Retail Leases Regulations – Regulatory Impact Statement (RIS)

February 2013

ContentsAbbreviations 3Executive summary 41. Introduction 61.1. Requirement for a Regulatory Impact Statement 61.2. Consultation 72. Legislative context 82.1. Retail Leases Act 2003 82.1.1. Policy intent of legislation 82.1.2. Definition of retail premises 92.1.3. Definition of small business 92.2. Retail Leases Regulations 2003 102.3. Retail Leases Amendment Act 2012 113. Nature and extent of the problem 123.1. Nature of the problem 123.1.1. Information asymmetry 133.1.2. Market imbalances 143.1.3. Transaction costs 153.1.4. Business disputes 153.1.5. Consumer protection 163.1.6. Tenant behaviour 163.2. Extent of the problem 173.2.1. Size of Victoria’s retail leases market 173.3. Key market participants 183.3.1. Small landlord-small tenant relationship 193.3.2. Large landlord-small tenant relationship 193.4. What evidence is available to support the problem? 193.4.1. Number of disputes 203.4.2. Cause of disputes 223.5. Rationale for government intervention 263.5.1. How effective is the existing regulatory regime? 263.5.2. Inadequate market based intervention 264. Current Regulations 284.1. Objectives 284.2. Prescribe an occupancy cost threshold to exclude large businesses 294.2.1. Occupancy cost approach 294.2.2. Occupancy cost comparison 304.2.3. Relationship with the publicly listed corporation rule 304.2.4. Alternative approaches 314.2.5. Setting an appropriate threshold 324.2.6. Other regulations about occupancy costs 334.3. Prescribe a formula to determine and apportion outgoings to reduce market

imbalances 344.3.1. Other regulations about outgoings 374.4. Prescribe a disclosure statement to reduce information asymmetries and

transaction costs 404.4.1. Benefits and costs of disclosure 414.4.2. National harmonisation 434.4.3. Disclosure statement options under consideration 444.5. Silent regulations 49

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5. Impact analysis 505.1. Approach to impact assessment 505.1.1. Multi-criteria analysis 505.2. Impact analysis – Occupancy costs 525.2.1. Base case 525.2.2. Criteria 1: Focus on small and medium sized retail businesses 545.2.3. Criteria 2: Optimises decision-making around the agreement of retail leases

585.2.4. Criteria 3: Cost to business 595.2.5. Summary 615.3. Impact analysis – Formula to determine and apportion outgoings 615.3.1. Base case 615.3.2. Criteria 1: Focus on small and medium sized retail businesses 625.3.3. Criteria 2: Optimises decision-making around the agreement of retail leases

635.3.4. Criteria 3: Cost to business 645.3.5. Summary 655.4. Impact analysis – Disclosure statements 665.4.1. Base case 665.4.2. Criteria 1: Focus on small and medium sized retail businesses 675.4.3. Criteria 2: Optimises decision-making around the agreement of retail leases

675.4.4. Criteria 3: Cost to business 695.4.5. Summary 746. Preferred options and the proposed Regulations 766.1. Summary of preferred options and proposed Regulations 766.1.1. Criteria used for assessment 766.1.2. Occupancy costs – Retain current threshold 766.1.3. Occupancy costs – Other changes 776.1.4. Formula to determine and apportion outgoings – Retain current formula

776.1.5. Disclosure statement – Develop two new statements 786.1.6. Proposed Regulations796.1.7 Competition impact……………………………………………………………..806.2. Implementation 806.3. Evaluation 816.4. Regulatory Change Measurement 817. References 83Appendix A: Retail businesses in Victoria 85Appendix B: Costing assumptions 86Appendix C: Jurisdictional use of disclosure statements 89Appendix D: Consultation 91Appendix E: Current and proposed disclosure statements, summary of content

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AbbreviationsAcronym DescriptionABS Australian Bureau of StatisticsACL Australian Consumer LawDBI Department of Business and InnovationNRTWG National Retail Tenancy Working GroupPC Productivity CommissionPwC PricewaterhouseCoopersRIS Regulatory Impact Statement SCCA Shopping Centre Council of AustraliaSBV Small Business VictoriaThe Act Retail Leases Act 2003The Regulations Retail Leases Regulations 2003VCEC Victorian Competition and Efficiency CommissionVSBC Office of the Victorian Small Business Commissioner

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Executive summaryA retail lease is a commercial contract negotiated between a landlord and tenant that outlines the legal and financial obligations of both parties with respect to renting a retail premise. The negotiation of appropriate lease arrangements will help ensure a mutually successful business relationship between a landlord and tenant.

Failures in the market for retail leases, notably information asymmetry, market imbalances and transaction costs, are seen to prevent the negotiation of such a mutually beneficial retail lease. These problems generally disadvantage the tenant during lease negotiations and result in inequitable and inefficient outcomes. Governments across Australia have recognised the existence of these market failures and introduced retail leases legislation that establishes minimum requirements to promote fair outcomes

The market for retail leases in Victoria is currently regulated by the Retail Leases Act 2003 (the Act) and the Retail Leases Regulations 2003 (the Regulations). The legislation is intended to encourage an environment of fairness during the negotiation and duration of the lease, so that landlords and tenants mutually benefit.

The Regulations sunset on 23 April 2013 and this Regulatory Impact Statement (RIS) has been developed to determine the form of the re-made Regulations. This RIS considers a number of options to support the operation of the Act and achieve the objectives of the legislation. A different regulatory response is required to achieve each objective but for each response the following options were considered: the base case (i.e. no regulations); no change (i.e. re-make the current Regulations); and making changes to the current Regulations.

A non-regulatory option, such as a code of practice, was not considered in this RIS because both government and industry stakeholders believe that such a code is unlikely to achieve the desired legislative objectives. The non-mandatory nature of a code of practice or similar instrument means that it would not achieve the same compliance levels as a regulatory approach, and it is expected that some participants in the market for retail leases would not comply at all.

After considering the potential changes, the preferred options involve re-making the current Regulations as follows:- minor amendment to the current occupancy cost threshold to clarify operation of

the Act and ensure it reflects industry practice;- minor amendment to the formula to determine and apportion outgoings to ensure it

reflects government policy intent as well as industry practice;- repeal of regulations 9 and 13 as they are considered to impose unnecessary

regulatory burden;- introduction of a new regulation to clarify the operation of the Act; and- introduction of new disclosure statements for retail premises not located in a retail

shopping centre, renewed leases, and assigned leases that involve the sale of the business operating from the retail premises.

It is difficult to quantify the full extent of the regulatory changes. However, the regulatory burden imposed by the disclosure statement requirements for new, renewed and assigned leases can be quantified and provides an indication of the total regulatory burden. It is estimated that the total cost imposed on Victorian businesses, primarily

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landlords of retail premises in Victoria, over the 10 years during which the proposed Regulations would be in place, is $36 million. Significantly, the proposed Regulations represent a substantial decrease in regulatory burden compared to the current Regulations. It is estimated that the current disclosure statement requirement would cost $62.6 million over 10 years, which is approximately 40 per cent more than the proposed disclosure statement requirements.

In summary, the proposed Regulations are anticipated to improve the regulatory environment for landlords and tenants of retail premises in Victoria. Through the RIS process, the regulatory burden has been reduced through the elimination of obsolete regulation and where regulation is still required, it has attempted to improve the regulation to better achieve the desired benefits and/or reduce the costs it imposes.

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1. IntroductionThis chapter outlines why a Regulatory Impact Statement (RIS) has been prepared and the consultation undertaken to date on the RIS.

1.1. Requirement for a Regulatory Impact StatementThe Retail Leases Regulations 2003 (the Regulations) sunset on 23 April 2013 and Small Business Victoria (SBV) has prepared this RIS with assistance from PricewaterhouseCoopers (PwC) to determine the form of the re-made Regulations. While the Act does not require any items to be prescribed in the Regulations, in reality, certain items must be prescribed to support the operation of the Act. Therefore, the Regulations must be re-made to some degree and the RIS considers options to amend the current Regulations.

Under section 7 of the Subordinate Legislation Act 1994, a RIS must be prepared for the proposed regulations unless an exemption is issued by the Premier or the responsible Minister. In general terms, a RIS is required for any subordinate legislation that imposes a ‘significant economic or social burden’ on any sector of the community, which is generally considered to be any quantifiable impact greater than $500,000 per annum.1

Based on an initial analysis, it was concluded that the re-made Regulations will impose a significant burden and a RIS is therefore required. This analysis is primarily based on the disclosure statement, which was expected to be prescribed in the proposed Regulations. The requirement to notify the Small Business Commissioner of certain lease details has been estimated as imposing a regulatory burden on landlords of Victorian retail premises between $700,000 and $1 million per annum.2 The requirement to provide a disclosure statement imposes a much higher burden than the notification requirement by requiring a substantial amount of additional information to be disclosed. Therefore, it can be safely assumed that the proposed Regulations will impose a significant burden.

A RIS forms an essential part of the regulatory development process as it considers the appropriateness of regulation in comparison to other non-regulatory options available to Government and the costs and benefits of all regulatory and non-regulatory options. It should also consider the sectors of the community where the costs and benefits will be attributed. The RIS process should ensure that:

− the implementation of regulation only occurs where this is a justified need;

− only the most efficient forms of regulation are adopted; and

− there is an adequate level of public consultation in the development of regulatory measures.

To adhere to the requirements of the Subordinate Legislation Act 1994, the purpose of this RIS is to:

- identify, establish and determine the nature and extent of the problem that the Government is seeking to address (Chapter 3);

- specify the desired objectives of intervention (Chapter 4);

1 Department of Treasury and Finance (2011), Victorian Guide to Regulations, August.2 Shopping Centre Council of Australia (2008), ‘Submission to the Productivity Commission’s inquiry into the retail tenancy market’, available at: http://www.pc.gov.au/projects/inquiry/retail-tenancies/submissions.

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- identify a set of options for Government to address the identified problems, assess the costs and benefits of these options, and the effectiveness of each option in addressing the problem before establishing a preferred option for Government action (Chapter 5); and

- summarise the preferred options and proposed regulations, develop an implementation and evaluation strategy (Chapter 6).

1.2. ConsultationSBV, with assistance from PwC, has undertaken consultation with key government and industry stakeholders to inform the development of the proposed regulations prior to release for public comment. Representatives from 15 stakeholder groups were invited to attend a Stakeholder Forum on 18 October 2012 and nine stakeholder groups attended. Of these 15 stakeholder groups, six lodged a written submission in response to a stakeholder consultation document. Stakeholders were predominantly industry associations representing landlords, tenants or other industry specialists such as lawyers and real estate agents. Further consultation with industry stakeholders was conducted via email to seek feedback on a draft of the proposed Regulations, particularly the draft form of the new disclosure statements. Details of the stakeholder consultation can be found in Appendix A.

Landlords and tenants of retail premises in Victoria were also encouraged to complete an online survey that was distributed through SBV’s Business Consultation Database (a register of individuals willing to be consulted by Government on regulatory change), electronic channels (social media, business.vic.gov.au website and SBV fortnightly update) and relevant industry association communications. However, due to low response rates, this data only supplements other information and does not form a data set in its own right.

Public comments and submissions are invited on the proposed regulations, in response to information provided in this RIS. All submissions will be treated as public documents unless specified otherwise. Written comments and submissions should be forwarded no later than 5pm on 25 March 2013 by:

Emailroger.arwas@dbi.vic.gov.au

PostMr Roger ArwasExecutive Director, Small Business VictoriaDepartment of Business and InnovationGPO Box 4509MELBOURNE VIC 3001

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2. Legislative contextThis chapter provides an overview of Victoria’s retail leases legislation, the policy intent of the legislation and key definitions that determine coverage of the legislation.

2.1. Retail Leases Act 2003Retail leases legislation was enacted in all States and Territories between 1984 and 2004.3 State based legislation imposes regulation aimed at ensuring the efficient and equitable operation of the market. Retail leases regulation in Australia takes a number of forms, including substantive restrictions on lease terms and general provisions to prohibit unconscionable conduct.4

The Retail Leases Act 2003 (the Act) regulates the commercial relationship between the landlord and tenant of a retail premises in Victoria. A retail lease is a type of commercial lease. All commercial leases in Australia are governed by property laws but retail leases are also subject to State/Territory retail leases legislation, which have more stringent lease requirements and tenant protections.

Retail leases legislation was introduced in Victoria in 1987 (Retail Tenancies Act 1986). The legislation has since been reviewed and amended four times: 1995 (Retail Tenancies (Amendment) Act 1995); 1998 (Retail Tenancies Reform Act 1998); 2003 (Retail Leases Act 2003); and 2005 (Retail Leases (Amendment) Act 2005). Each amendment has sought to clarify the law and implement practical improvements to retail leases legislation. As a result, the quantity of legislation has increased and Victorian retail leases legislation has become quite prescriptive and some stakeholders believe it is now too prescriptive.

To ensure that small business tenants and landlords are well informed about the extent of their obligations, the Victorian Small Business Commissioner website (http://www.sbc.vic.gov.au/retail-leasing-matters/specific-areas-of-the-act) contains information about particular aspects of the Act.

2.1.1. Policy intent of legislationThe Act came into operation on 1 May 2003 and the current legislation is the result of a comprehensive review in 2001 (2001 Review) in response to an election commitment by the previous Government to ensure Victoria’s retail tenancy laws better protect small and medium sized retail tenants. The Act aimed to “establish a new regulatory framework for retail tenancies that promotes greater certainty, fairness and clarity in the commercial relationship between landlords and tenants of retail premises.”5 The main objectives of the legislation are to enhance the:

− certainty and fairness of retail leasing arrangements between landlords and tenants; and

− mechanisms available to resolve disputes concerning leases of retail premises.

The legislation is intended to encourage an environment of fairness during the negotiation and duration of the lease, so that landlords and tenants mutually benefit. The Government “developed legislation that represents a fair balance between the

3 Productivity Commission (2011), Economic Structure and Performance of the Australian Retail Industry, Inquiry report, November.4 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.5 Second Reading Speech, Retail Leases Bill (2003), Victoria, Legislative Assembly, 27 February, John Brumby.

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interests of tenants and landlords.”6 ). The Government has legislated to ensure that one party does not unfairly take advantage of its superior information and negotiating power to the detriment of the other party. The Act contains minimum provisions that cannot be overridden through lease negotiations.

The following five policy principles were used to guide the development of the current retail leases legislation.7 These principles aim to address the market failures described later in section 3.1.

1. Retail leases legislation should only protect small and medium sized retail businesses.

2. Government regulation of retail leases should focus on addressing information imbalances and the misuse of market power.

3. Government involvement in retail leases matters should aim at ensuring that prospective tenants have sufficient knowledge to make an informed business decision.

4. While a landlord has a fundamental right of control over the use of its property, this right does not extend to engaging in unfair business practices.

5. Landlords and tenants should be able to access a low cost informal dispute resolution forum prior to any grievances proceeding to formal litigation.

2.1.2. Definition of retail premises‘Retail premises’ is defined in section 4 of the Act. Premises are ‘retail premises’ if, under the terms of the lease, the premises are used or are to be used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services.

The Act does not define ‘retail’. The ordinary meaning or dictionary definition of retail means the provision of goods or services, which generally involves a sale to an ultimate consumer. It is implicit in the concept of ‘sale’ that goods are sold at a price, which involves the payment of money.8

Section 4 of the Act also provides that certain premises are not ‘retail premises’. Broadly, retail premises will be excluded from coverage under the Act if the tenant has occupancy costs greater than the prescribed amount or is a publicly listed company. Certain types of premises are also specifically excluded from coverage under the Act via Ministerial Determination. These exclusions aim to ensure that only small to medium sized retailers are covered by the Act.

2.1.3. Definition of small businessThere is no consistently used definition of ‘small business’. Common definitions categorise businesses based on the number of employees (used by the Australian Bureau of Statistics (ABS), Fair Work Commission and several small business surveys) or annual revenue (used by the Australian Taxation Office).

6 Second Reading Speech, Retail Leases Bill (2003), Victoria, Legislative Assembly, 27 February, John Brumby.7 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.8 Victorian Small Business Commissioner (2005), ‘What are “retail premises”?’, November, available at: http://www.sbc.vic.gov.au/images/stories/pdf/vsbc_what_are_retail_premises_revised_guidelines.pdf.

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SBV adopts the ABS definition, which defines a small business as a business with less than 20 employees and a medium sized business as a business with between 20 and 199 employees. The ABS definition of small business is adopted in the Shop Trading Reform Act 1996. The Retail Leases Act 2003, however, does not expressly define small business or medium sized business.

Including or excluding businesses from coverage under the Act based on the number of employees is considered inappropriate as there are practical difficulties with such criteria. For instance, the number of employees can vary dramatically during the course of a lease. It may also be difficult for the landlord to verify the number of employees a tenant has to determine whether the legislation applies.9

Instead, the Act uses other criteria to ensure that large businesses are not captured by the legislation. Section 4 of the Act lists exclusions to the definition of ‘retail premises’ and those exclusions relating to business size include:

− premises with occupancy costs greater than the amount prescribed in the Regulations (i.e. $1 million per annum);

− premises the tenant of which is a listed corporation (as defined by the Corporations Act 2001) or a subsidiary of such a corporation; and

− premises the tenant of which is a body corporate whose securities are listed on an international stock exchange or a subsidiary of such a body corporate.

The 2001 Review of the retail leases legislation gave extensive consideration to which criteria should be used as a suitable basis for defining a small business to ensure the Act provided suitable protection of smaller tenants of retail premises. This is discussed further in section 4.2.

2.2. Retail Leases Regulations 2003The Regulations are made under section 99 of the Act to facilitate the Act’s operation and also commenced operation on 1 May 2003 to accompany the Act. The objectives of the Regulations are guided by the policy principles underpinning Victoria’s retail leases legislation. The stated objectives of the Regulations are to:

− make provision with respect to the amount of occupancy costs for the purpose of excluding certain retail premises;

− make provision with respect to the amount of outgoings payable by a tenant; and

− to prescribe the form of the landlord’s disclosure statement.

Amendments to the Regulations came into effect on 1 January 2011 to introduce a new disclosure statement based on a core model national disclosure statement that was developed in 2010. The model disclosure statement was developed by the National Retail Tenancy Working Group to facilitate national harmonisation of retail leases legislation across jurisdictions.

The Act gives power for a number of matters to be prescribed in the Regulations. However, not all powers to prescribe are utilised, with the Regulations remaining silent in a number of areas. For example, the following sections of the Act refer to the Regulations and the sections marked with an asterisk (*) do not prescribe relevant items in the current Regulations:

9 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.

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− section 4 Meaning of ‘retail premises’ (occupancy costs);

− section 17 Landlord’s disclosure statement;

− section 26 Landlord’s disclosure on renewal of lease;

− section 30 Alterations to premises to enable fit out*;

− section 35 Rent reviews generally*;

− section 39 Recovery of outgoings from the tenant;

− section 40 Liability to contribute to non-specific outgoings;

− section 47 Statement of outgoings;

− section 61 Procedure for obtaining consent to assignment (disclosure statement);

− section 72 Unspent advertising and promotion contributions;

− section 84 Functions of the Small Business Commissioner*;

− section 86 Referral of retail tenancy disputes for alternative dispute resolution*; and

− section 99 Regulations.

2.3. Retail Leases Amendment Act 2012The Retail Leases Amendment Act 2012 commenced on 21 November 2012 and repealed section 25 of the Act, which required a landlord of a retail premise to notify the Small Business Commissioner of certain details of a new (or renewed) retail lease within 14 days of the lease being signed. Regulation 9 in the Regulations prescribed additional details that must be notified including: the lease expiry date; the email addresses of the landlord and tenant; and the date(s) on which an option (if any) may be exercised under the lease. As a consequence of repealing section 25, regulation 9 was also revoked and the re-made Regulations will need to reflect this change. .

The removal of the notification requirement for retail leases was recommended by the Victorian Competition and Efficiency Commission (VCEC) in its draft report ‘Part 2 – Priorities for Regulatory Reform: An Inquiry into Victoria’s Regulatory Framework, March 2011 (draft recommendation 6.9)’. The Productivity Commission has also cited Victoria’s requirement to notify the Small Business Commissioner of certain lease details as an example of unnecessary regulation. The amendments are consistent with the Government’s commitment to reduce red tape and compliance costs on business by 25 per cent by 1 July 2014. Landlords will experience an administrative cost saving due to no longer needing to notify the Small Business Commissioner of lease details, which is estimated to save between $700,000 and $1 million per annum in red tape.10

10 Shopping Centre Council of Australia (2008), ‘Submission to the Productivity Commission’s inquiry into the retail tenancy market’, available at: http://www.pc.gov.au/projects/inquiry/retail-tenancies/submissions.

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3. Nature and extent of the problem This chapter considers several market failures that may warrant government intervention and how these manifest in the market for retail leases. This chapter also examines the size of the retail leases market and key relationships in the market between landlords and tenants. Finally, this section considers the extent of market failure by looking at the number and type of retail lease disputes between landlords and tenants.

3.1. Nature of the problemMost small retailers lease premises and the cost of rent payable and other terms of the lease (along with staff costs) are usually the retailer’s greatest expense and can have a major impact on a tenant’s business. PwC estimates that on average, occupancy costs (i.e. rent plus outgoings) represents 7.8 per cent of turnover for retail businesses (see Appendix A). However, occupancy costs as a proportion of turnover varies greatly from 1.1 per cent for businesses in houseware and hardware retailing to 23.4 per cent for clothing retailing businesses. This result is likely to reflect the prime retail locations (e.g. Bourke Street mall and Chadstone shopping centre) and associated high rents in which clothing stores are located.

If all parties to a lease adopted good and fair business practices there would be little need for the regulation of retail leases. Governments across Australia have recognised that this is not always the case and have introduced retail leases legislation that establishes minimum requirements to promote fair outcomes.11 The legislation must be able to provide for successful relationships and more efficient arrangements than would otherwise be achieved between landlords and tenants, without imposing additional and unnecessary burden on the parties.12

The basis of the commercial relationship between the landlord and tenant is the mutual pursuit of profit from the retail premises under lease. For the landlord this is sought through rent from the premises and for the tenant this is achieved through retail sales and possibly the sale of the business.13 Factors such as the location, rent and other costs payable are fundamental to the success of the business. The negotiation of appropriate lease arrangements is therefore a crucial aspect of ensuring a mutually successful business relationship between a landlord and tenant.14

The lease is the commercial contract that reflects this relationship and is negotiated between two consenting business owners. The lease will outline the legal and financial obligations of both the landlord and the tenant and a lack of understanding of these obligations may have significant repercussions.

A lease is legally binding and defines the legal relationship between the landlord and the tenant.15 Both parties to the lease, and particularly prospective tenants, should ensure they understand all provisions of the lease they are about to enter into and their legal obligations. Even a well-drafted lease may be difficult for some parties to

11 Second Reading Speech, Retail Leases Bill (2003), Victoria, Legislative Assembly, 27 February, John Brumby.12 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.13 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.14 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.15 Productivity Commission (2011), Economic Structure and Performance of the Australian Retail Industry, Inquiry report, November.

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understand, particularly small landlords, small tenants, and people with limited English skills.

A lease is also a financially binding document. Rent is only one of the costs payable and other significant costs are associated with the lease such as fit out, repairs and maintenance, and outgoings. A well-drafted lease should clearly detail whether the landlord or tenant is liable for particular costs and provide a breakdown of those costs.

Efficiently functioning markets will generally provide the best means of ensuring that goods and services are delivered at least cost. Government regulation is justified where market failure occurs and regulation provides for a more efficient outcome than non-regulatory alternatives.16 Market failures can be viewed as scenarios where the price for a good or service is not reflective of its true market value due to distortions created by the inefficient allocation of resources, information asymmetry or the establishment of monopolies. Without government intervention tenants, particularly smaller retailers, will face higher costs during the negotiation of the lease and throughout the duration of the lease.

There are certain characteristics of the market for retail leases that result in three specific and interrelated problems or market failures: information asymmetry; market imbalances; and transaction costs. These problems also increase the risk of business disputes between a landlord and tenant which creates a fourth problem. Two other related or secondary problems are also evident, which are consumer protection and tenant behaviour. How each problem manifests in the retail leases market is explained in the sections below.

3.1.1. Information asymmetryInformation asymmetry occurs when relevant information is known to some but not all parties and favours the more knowledgeable party involved in the transaction. Information asymmetry causes markets to become inefficient since all the market participants do not have access to the information they need to inform their decision making and this may result in poor decisions being made.

In the retail leases market both parties have incentives to ensure that they base their decision on as complete information as possible and are responsible for conducting their own due diligence.

Existing regulation precludes landlords from providing false information to prospective tenants. However, the landlord (particularly large shopping centre landlords) may be in possession of information that prospective tenants are not and in some circumstances this may constitute an advantage for the landlord during lease negotiations. A tenant could obtain some of this information by conducting due diligence and obtaining specialist advice. However, engaging specialist advice from a lawyer, property consultant or other advisor is often a significant cost, particularly for small tenants. Further, some information will not be publicly available due to its ‘commercial in confidence’ nature, such as foot traffic, annual turnover of the shopping centre, the landlord’s future intentions in relation to refurbishment, or changes to the tenancy mix.17

Tenants, particularly smaller retailers, may find it difficult to access the necessary information to enable them to make an informed decision when considering entering a lease. As a result, prospective tenants may not be adequately informed as to certain matters regarding the leasehold interest, which could have a major impact on the success of the business.

16 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.17 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.

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However, as further explained in s4.4.1, there are incentives for landlords to share information with prospective tenants. Tenants who enter into a lease fully informed from the start are more likely to become stable, long-term tenants and the likelihood of future dispute is also reduced, saving the landlord time and money in the future.

An important principle of the Act is that the parties know what they are getting into before entering into the lease. In general, asymmetric information can justify the provision of information which would not ordinarily form part of the lease or could not otherwise be ascertained through basic due diligence.18 Well-informed decision making in this context has broader economic benefits, as landlords compete to attract retailers with high consumer appeal and efficient, profitable retailers are able to secure tenancies from which they may better meet customer demand.19

3.1.2. Market imbalancesMarket imbalances, in terms of uneven negotiating or bargaining power, relates to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing then they will have equal bargaining power. If one party has greater power than the other to choose not to take the deal, then that party is more likely to gain favourable terms.

The potential imbalance in bargaining power between landlords and tenants adds further weight to the argument for government intervention through disclosure requirements. In the absence of such imbalances it might be assumed that competitive market forces would lead parties to disclose the information of most potential value to commercial counterparties, such as prospective tenants.20 To the extent that competitive pressures are insufficient to bring about voluntary disclosure, there may be a case for a mandated approach.21

In the retail leases market the landlord often has greater bargaining power than the tenant when negotiating a lease. A tenant may be able to improve their negotiating position by seeking specialist advice (e.g. a lawyer) but this is often a significant expense, particularly for small tenants. The tenant’s negotiating position will also be affected by internal factors (e.g. level of business experience, type of good or service being sold) and external factors (e.g. the retail location and retail format) that they may have limited ability to control.

This imbalance in market power is particularly evident when the landlord is a shopping centre. Such landlords are often very large companies and possess a strong negotiating position when setting the terms of a lease and determining who it will permit to operate there.22 An individual small business is usually not in a position to significantly affect the terms and conditions of the lease offered by the landlord of a shopping centre. In some instances a shopping centre may also have localised market power and the retailer may have little choice but to locate in the shopping centre in line

18 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.19 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.20 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.21 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.22 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.

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with consumer expectations.23 Such localised market power is more common in non-metropolitan centres where there are a limited number of shopping precincts.

Uneven market power is also highlighted upon renewal of a lease. A substantial portion of a retailer’s goodwill or custom is location specific and moving location often means a loss of trade as well as a loss of investment in the fit-out of the premises. In effect, the landlord has the power to determine whether the tenant can stay by offering an option to renew the lease. If the landlord does offer an option to renew the lease this does not guarantee a tenant can stay as the new rent may be unaffordable. Furthermore, the lease length and conditions will impact the tenant’s ability to sell the business with a longer lease term more favourable for sale. These situations place the tenant in a vulnerable negotiating position reliant on the legal framework to provide a minimum level of protection.

3.1.3. Transaction costsTransaction costs are the costs associated with the exchange of goods or services in the market. Transaction costs cover a wide range of expenses and include search and information costs, legal fees and commissions and transportation costs. Transaction costs are a critical factor in deciding whether to engage in an economic exchange and are often referred to as ‘the cost of doing business’. High transaction costs can inhibit market exchanges that would otherwise result in an efficient allocation of resources.24

In the retail leases market both landlords and tenants face transaction costs in negotiating and maintaining a lease. However, small tenants often face higher transaction costs due to the information asymmetries and market imbalances described above. Tenants, particularly small retailers, may find the costs associated with negotiating the lease and understanding the terms and conditions to be disproportionately high. As a result, a tenant may enter into a lease without fully understanding their legal and financial obligations and the impact on the success of their business.

3.1.4. Business disputesInformation asymmetries, market imbalances and transaction costs all increase the likelihood of a business dispute between a landlord and tenant. These problems impede the ability of both parties, and particularly tenants, to understand fully the lease and its legal and financial obligations which may increase the incidence of disputes later in the lease.

Business disputes are costly and take valuable resources away from the business, government and economy more broadly. Disputes also reduce goodwill and affect the ability of the parties to maintain their commercial relationship, which may result in ongoing conflict throughout the lease period.

The complexity of retail leases can lead to business disputes even if proper due diligence is conducted by both the landlord and tenant prior to entering into the lease. One of the objectives of the Act is to enhance the mechanisms available to resolve disputes concerning leases of retail premises. This objective was achieved by the establishment of the Office of the Victorian Small Business Commissioner (VSBC) in 2003 to provide low cost dispute resolution for retail lease disputes.

23 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.24 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.

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3.1.5. Consumer protectionRegulation can be justified on the basis of achieving a social goal that the market would not deliver and which overrides efficiency concerns such as consumer protection.25 The accepted intention of retail leases legislation to protect small retail tenants reflects principles of consumer protection.26 Consumer protection laws are a form of government regulation that aim to protect the rights of consumers by regulating the relationships between individual consumers and the businesses that sell those goods and services. Consumer protection legislation is also designed to ensure the free flow of truthful information in the marketplace to help consumers make better choices. For example, a government may require businesses to disclose detailed information about products, particularly in areas where safety or public health is an issue, such as food.

Those who question retail leases legislation say that the government should not make laws that interfere with the private commercial transactions of landlords and tenants. Others say that the government has a responsibility to ensure that private commercial transactions are conducted on a level playing field.27

The argument in favour of government intervention has grown in strength with the development of fair-trading and consumer protection laws. In particular, there has developed a community acceptance that commercial transactions should be conducted in good faith and according to standards of honest conduct. These standards are enshrined in the new Australian Consumer Law (ACL) which commenced on 1 January 2011. Broadly, the ACL applies to consumer transactions for all goods and services except financial services that are covered by different legislation. The main consumer protection provisions in the ACL regulate or prohibit a range of unfair trade practices including: misleading and deceptive conduct; the making of false representations in relation to the sale of goods and services; unconscionable conduct; and unfair terms in consumer contracts and standard form consumer contracts. This context is particularly relevant to retail leases.

3.1.6. Tenant behaviourThe above sections focused on problems caused by landlord behaviour, however, it should be acknowledged that problems evident in the market for retail leases are exacerbated by tenant behaviour. Ultimately, the tenant is responsible for its decision to enter into a retail lease and the tenant should ensure they have sufficient information on which to base this decision by conducting due diligence.

Information provided by the landlord about the lease, (e.g. in the disclosure statement) should complement and not substitute due diligence. For instance, the disclosure statement requires a landlord to disclose the tenant mix and foot traffic of the shopping centre. However, this does not mean a prospective tenant should not visit the shopping centre and directly experience customer flow, the layout of the shopping centre, whether casual mall leasing is allowed (i.e. use of common areas of a shopping centre for casual trading or promotional activities) and other easily observable items. Similarly, a prospective tenant could visit the local neighbourhood and monitor the media for any indication of future developments in the area that may affect the viability of the business. For example, the opening of a major hardware store in the area may have a positive impact on some retailers (e.g. create increased customer traffic for a nearby

25 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.26 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.27 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.

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café or furniture store) but a negative impact on other retailers (e.g. create competition for the local hardware store).

Unfortunately, due to the limited resources and/or inexperience of many small businesses this due diligence may not be conducted or not conducted thoroughly. This raises the question of how much information should be prescribed to ensure that tenants have a minimum amount of information to use in decision-making and this argument to date has justified the inclusion of a disclosure statement in the Regulations.

3.2. Extent of the problem

3.2.1. Size of Victoria’s retail leases marketRetailing is a vital part of the Victorian economy. Victoria has a diverse and vibrant retail sector ranging from world-class shopping centres to specialist stores in laneways. The retail sector is a major employer and contributor to the economic activity of the State. The market for retail leases exists to provide space for the provision of all manner of final goods and services in a retail format to the public, including individual households and business customers. Retail space may be owned by the retailer but is usually provided by landlords in many formats including stand-alone premises, neighbourhood shops and shopping centres.28

The size of the market for retail leases is difficult to determine due to the broad range of businesses that lease premises. As discussed in section 2.2, retail premises are broadly defined as premises from which goods or services are sold or hired to an ultimate consumer, usually an individual. Thus, the market for retail leases comprises a broad range of businesses including typical retailers such as supermarkets, department stores, clothing chains, cafes, restaurants, petrol stations, and florists.. Appendix A shows that, according to ABS figures, there are over 20,000 employing retail businesses in Victoria, many of which are expected to lease premises. Some of the 13,000 plus non-employing retail businesses may also lease premises. However, the definition of retail premises under the Act is much broader than the definition of retail used by the ABS and also captures many professional services such as hairdressers and doctors.

The Productivity Commission’s 2008 report ‘Inquiry into the market for retail tenancy leases’ estimated that there are approximately 290,000 retail leases in Australia, with about 20 per cent of these leases for retailers located within shopping centres. The Productivity Commission estimates that there are 72,000 leases under retail lease regulation in Victoria. The Productivity Commission’s estimate was based on data available from the VSBC. Until recently leases covered by the Act were required to be notified to the Small Business Commissioner whenever a lease was entered into or renewed. Table 1 below outlines the number of lease notifications received by the VSBC each year.

Table 1: Number of lease notifications

Year Number of lease notifications

2003-04 10,1932004-05 14,4252005-06 14,475

28 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March.

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2006-07 14,5182007-08 14,4172008-09 14,4762009-10 14,0452010-11 13,7922011-12 13,762

Total 124,103Average 13,789

Source: VSBC Annual Reports

The number of leases notified over the last nine years has averaged around 13,800 each year. As the standard lease term is five years it can be extrapolated that there are around 69,000 leases in Victoria (13,800 average number of notified leases x 5 years = 69,000). The actual figure is likely to be higher as some landlords may not have complied with the notification requirement.

3.3. Key market participants Table 2 below outlines the key types of participants in the retail leases market and the relationships between them. It is the perceived imbalance between a large landlord and a small tenant (Relationship B) that has formed the basis for government intervention in the retail leases market. Most retail leases legislation has been introduced to deal with this relationship. In this relationship the landlord is usually considered to be a shopping centre landlord. ‘Retail shopping centre’ in defined in section 3 of the Act and broadly means five or more retail premises owned by the same person and located in the same building or adjoining buildings.

However, retail lease legislation also plays an important role in regulating the relationship between a small landlord and a small tenant (Relationship A) which is a more common relationship than Relationship B.29The tenant’s large size in the other two scenarios (Relationship C and Relationship D) means these relationships are generally excluded from coverage under the legislation.

Table 2: Interaction of participants in the retail leases market

Small low-resourced tenantse.g. small business

Large well-resourced tenantse.g. supermarket, department store

Small low-resourced landlordse.g. private investor

Relationship A

Most common relationship, with both parties required to seek advice on the lease. The negotiating position of each party is likely to be similar and will be influenced by factors such as business experience.

Relationship C

Uncommon relationship, due to the substantial investment required to provide retail space for larger tenants.

Large well-resourced landlordse.g. shopping centre

Relationship B

Common relationship, with the tenant in particular required to seek advice on the lease. The

Relationship D

Common relationship, with both parties expected to have the resources and experience to look

29 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March.

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negotiating position of the tenant is generally weaker and will be influenced by factors such as business acumen, retailing format/location and the type of product retailed.

after their own interests.

Source: Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March.

3.3.1. Small landlord-small tenant relationshipAs stated in Table 2 the small landlord-small tenant relationship (Relationship A) is the most common. This relationship type also has the potential to be the most problematic. In this scenario the landlord is less likely to have superior information and bargaining power compared to the tenant and this acts to level the playing field. However, both parties are less likely to understand adequately their rights and obligations imposed by the lease and Act resulting in a higher likelihood of non-compliance with the legislation and dispute. The VSBC plays an important role in helping resolve disputes between small business tenants and landlords through the facilitative services it provides.

While the Act aims to protect smaller tenants it also provides protection for smaller landlords by providing a legal framework within which leases are to be negotiated and stating the rights and responsibilities of both landlords and tenants.

3.3.2. Large landlord-small tenant relationshipAs stated above, retail leases legislation has generally been introduced to regulate the relationship between large landlords and small tenants (Relationship B). There is a common perception that large landlords take advantage of small tenants. It is acknowledged that large landlords, such as a shopping centre landlord, typically have superior information and a stronger negotiating position as described in section 3.1, which favours the landlord during lease negotiations.

As large landlords are usually well resourced they are better able to understand and comply with the legislation and lease. Anecdotal evidence from the VSBC indicates that shopping centres rarely breach the provisions in the lease and Act. Nevertheless, this is not to say that some shopping centre landlords do not take advantage of small tenants due to their lack of understanding or awareness of the provisions of the Act.

This relationship highlights the need for government to ensure there is a sound regulatory framework in place with appropriate protection for smaller tenants. If large landlords comply with the legislation then the legislation must be adequate and must not create unintended consequences. It also highlights the need to educate tenants about the different costs, benefits and risks associated with locating in a shopping centre versus a non-shopping centre. A shopping centre location is likely to have higher costs (e.g. rent, outgoings, fit out requirements) and stricter lease conditions but may also represent greater profit, and a prospective tenant should be aware of the trade-off.

3.4. What evidence is available to support the problem?There is limited empirical evidence available to demonstrate the key problems or market failures described in section 3.1. However, due to the large number of retail premises in Victoria, the impact of any market failures is likely to be significant. Data on

19

business disputes is available from the VSBC and this helps illustrate the nature of these market failures.

3.4.1. Number of disputesThe Act requires that retail lease disputes go to the VSBC for mediation before they are able to progress to the Victorian Civil and Administrative Tribunal for determination. The number of applications for assistance received by the VSBC in relation to retail lease disputes has steadily increased each year since the establishment of the Office in 2003 (see Table 3 and Figure 1 below).

The increase in the number of applications for assistance is partly due to increasing awareness in the business community of the low cost and efficient dispute resolution services provided by the VSBC. The recent peaks may also be a reflection of the current difficult trading environment for retailers. The Small Business Commissioner has also suggested that the number of retail lease disputes is rising partly because landlords are seeking payment of outstanding rent from tenants and tenants are questioning rent increases.30

However, retail lease disputes represent about 1.3 per cent of all leases in the market.31

This low level of disputation suggests that the regulatory framework is effective. Further, in 2011-12 approximately half of the retail lease dispute applications proceeded to mediation. The other half were predominantly resolved through preliminary assistance conducted by the VSBC. This suggests that many disputes are minor in nature and a key role of the VSBC is to help clarify the rights and responsibilities of the parties to the lease using a ‘light touch’ (e.g. a telephone call or letter to the respondent).

Table 3: Retail lease disputes

YearTotal retail

lease disputes

Shopping centre disputes

Total Shopping centre as applicant

Shopping centre as respondent

# %* # %** # %**2003-04 494 91 18 29 32 62 682004-05 754 123 116 45 37 78 632005-06 790 120 15 36 30 84 702006-07 874 122 14 28 23 94 772007-08 926 95 10 21 22 74 782008-09 1,026 75 7 30 40 45 602009-10 995 63 6 13 21 50 792010-11 1,070 55 5 9 16 46 842011-12 1,144 92 8 19 21 73 79Total 8,073 836 10 230 28 606 72Average 897 93 10 26 28 67 72

Source: VSBC Annual Reports* Percentage of total retail lease disputes

** Percentage of total shopping centre disputes

Figure 1: Retail lease disputes – total disputes vs. shopping centre disputes

30 Wilson, Neil (2012), ‘Small business disputes rarely go too far’, Herald Sun, 11 May, available at: http://www.heraldsun.com.au/business/small-business-disputes-rarely-go-too-far/story-fn7j19iv-1226352495170. 31 897 (average number of disputes each year) / 69,000 (estimated number of leases) x 100 = 1.3.

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0

200

400

600

800

1000

1200

1400

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Year

Num

ber o

f dis

pute

s

Total disputes

Shopping centre disputes

Source: VSBC Annual Reports

Table 3 and Figure 1 above demonstrate that a relatively low proportion of all retail lease disputes handled by the VSBC have involved a shopping centre. In total, the VSBC has received 836 applications involving a shopping centre, representing 10 per cent of all retail lease applications (see column 4 of Table 3). This result may indicate that the legislation effectively regulates the relationship between a large landlord and a small tenant.

Table 3 above and Figure 2 below also demonstrate that the shopping centre landlord was the respondent (i.e. the tenant submitted the application for VSBC assistance) in 72 per cent of all retail lease applications involving a shopping centre (see column 8 of Table 3). This suggests that tenants see the VSBC as an effective way to resolve a dispute if they believe their landlord has breached the lease or legislation. However, this may also be an indication of the shopping centre’s greater bargaining power with tenants requiring assistance to handle disputes. The relatively low percentage of disputes overall may also suggest that some tenants in shopping centres do not pursue disputes with their landlord because they perceive that they may be at a disadvantage due to an imbalance in market power.

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Figure 2: Shopping centre disputes – Shopping centre as applicant vs. respondent

0

20

40

60

80

100

120

140

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Year

Num

ber o

f dis

pute

s

Total shopping centre disputes

Shopping centre - Applicant

Shopping centre - Respondent

Source: VSBC Annual Reports

The low proportion of retail lease disputes involving shopping centres as shown in Table 3and Figure 1 also suggests that the majority of applications for assistance are for disputes between a small landlord and a small tenant. This supports the argument in section 3.3 that the small landlord-small tenant relationship is the most common and the most problematic and requires the protection provided by the legislation and the facilitative services offered by the VSBC.

3.4.2. Cause of disputesThe VSBC categorises retail lease applications by topic or issue and Figure 3 below demonstrates the most common types of retail leases disputes received by the Office since May 2003. The table indicates that the top five causes of retail lease disputes are: payment of outstanding monies by tenant; landlord’s obligations; value of outgoings, expenses and rent; repairs and maintenance; and tenant’s obligations. It should be noted that a dispute may fall under several categories as disputes often involve more than one issue.

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Figure 3: Common types of retail leases disputes

0

200

400

600

800

1000

1200

1400

1600

Payment of

outstanding monies

by tenant

Landlord’sobligations

Value of outgoings,expenses and rent

Repairs and

maintenance

Tenant’s obligations

Security deposit

Options andrenew

als

Landlord’sunconscionable

conduct

Premature

termination of lease

Transfer/Assignment

of lease

Make good on expiry

Dispute category

Num

ber o

f dis

pute

s

Source: VSBC statistics (1 May 2003 – 30 June 2012)

There are two dispute categories of particular relevance to the Regulations: the value of outgoings, expenses and rent; and the landlord’s failure to provide a disclosure statement. Since 2003, the VSBC has received a total of 994 applications for assistance in relation to the value of outgoings, expenses and rent (e.g. unpaid outgoings or the amount of outgoings). This represents approximately 14 per cent of the total number of retail lease applications received by the VSBC. The relatively high percentage may indicate that while the landlord provides the tenant with a disclosure statement, the disclosure statement may not clearly indicate which party is responsible for particular costs or accurately estimate costs. The dispute may also involve a discrepancy between the lease and the disclosure statement in relation to outgoings. This result may also indicate that the landlord has not complied with other provisions in the legislation, such as the requirement to provide a statement of outgoings or has not determined and apportioned outgoings correctly.

Over the past 10 years, VSBC has also received a total of 21 applications for assistance in relation to a landlord’s failure to provide a disclosure statement. This represents less than one per cent of the total number of retail lease applications received by the VSBC. The low percentage indicates that compliance with the legislation is high.

The 2003 Act strengthened sanctions on the landlord for failure to provide a disclosure statement or for providing an incomplete or inaccurate statement. A landlord may face significant financial consequences for non-compliance with subsection 17(1) of the Act, which requires a landlord to provide the tenant with a disclosure statement at least seven days before entering into the lease. For example, a tenant is able to withhold rent until a disclosure statement is provided (subsection 17(3)(a)) and the tenant is not

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liable to pay rent for the period between notice of non-disclosure and disclosure (subsection 17(3)(b)). Therefore, it is expected that landlords would comply with the requirement to provide a disclosure statement as it is in their interests to do so and this is consistent with the low percentage of disputes.

The following case study illustrates the information asymmetries and market imbalances faced by tenants and how this has contributed to a retail lease dispute. Other examples provided by the VSBC include a matter where the tenant alleged that the lease commencement date of an anchor tenant (i.e. major tenant in a shopping centre such as a supermarket or department store) in the disclosure statement was misleading, and as a result sought an extension of a rent-free period. These examples illustrate the importance of accurate, transparent information in decision making.

Case study 1: Owner’s corporation feesA tenant lodged a dispute with the VSBC regarding the amount of owner’s corporation fees charged by the landlord. The disclosure statement estimated the tenant would be charged $3,500 per annum. However, the tenant was charged owner’s corporation fees of $11,500 for the first year of the lease and invoiced $19,000 for the second (current) year of the lease.

The tenant claimed s/he would not have entered into the lease if they knew the estimate was so inaccurate. The landlord claimed the disclosure statement included the best estimate at the time and provided evidence to support the actual fees charged.

Mediation found that while the disclosure statement included an estimate of owner’s corporation fees as an outgoing the lease did not state which outgoings the tenant was liable for as required under section 39(1)(a) of the Act.

Further, a breakdown of the owner’s corporation fees indicated a number of items that the tenant was not liable for (e.g. fire service maintenance). As a result the tenant and landlord agreed on a reduced fee for the current year and on a new amount for the remaining years of the lease.

This case study demonstrates the need to ensure that the estimate of outgoings is reasonably accurate and that the items to be payable as outgoings are specified in the lease as well as the disclosure statement. This case study also highlights the need for transparency in relation to outgoings to ensure that tenants are only charged for outgoings that they benefit from.

The second case study highlights the important role that disclosure statements (and the underlying legislation) can play in resolving disputes and ensuring the costs are distributed between landlords and tenants in a fair and equitable manner.

Case study 2: Repair of hot waterservice A landlord and tenant negotiated the rental on a lease of a small shopfront. The tenant wished to use the premises to run a cafe.

The landlord provided the tenant with a lease and disclosure statement outlining both parties' obligations.

The lease commenced and all was going well until the breakdown of the hot water service on which the tenant depended.

The landlord stated to the tenant that, notwithstanding the fact that landlords are responsible for repairs and maintenance under section 52 of the Retail Leases Act 2003, he was not responsible for fixing the hot water service as it had been the previous tenant who had installed it therefore it was the new tenant's

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responsibility to fix it.

The tenant contacted the VSBC and was advised to refer to his lease and disclosure statement. The tenant found that the landlord had ticked that the hot water service was an existing piece of equipment or fixture provided by the landlord.

The tenant pointed this out to the landlord who acknowledged his error and replaced the hot water service.

3.4.3. Problems that would exist if the Regulations were allowed to lapse

In the absence of the Regulations the market for retail tenancy leases in Victoria would experience:

− An increase in inefficient decision-making, leading to sub-optimal outcomes – as has been noted by the Productivity Commission and Victorian stakeholders disclosure statements have generally been effective in “encourag[ing] better informed decision making and contracting.”32 In the absence of a requirement for landlords to provide tenants with a disclosure statement the information asymmetries described in Section 3.1.1 would remain unaddressed. This would increase the chances that prospective tenants may make a decision about a lease agreement (either accepting or declining) that would be different to the decision they would have made if they had had access to complete information. Such inefficient decisions can impose costs on both tenants and landlords (through business failures or foregone revenue from a business opportunity that was not progressed).

− An increase in disputes – in the absence of the Regulations the information asymmetries, market imbalances and transaction costs described in section 3.1 would increase the potential for:

a) tenants and landlords to be uncertain, and not have a shared understanding, about the terms and conditions of a lease; and

b) larger landlords (or tenants) to act in a manner that is not fair and equitable. For instance, some stakeholders have noted that, in the absence of a prescribed formula to determine and apportion outgoings, there would be potential for “shopping centre landlords to pass any shortfall in outgoings from … major tenants onto the speciality retailers in shopping centres”, as was the case prior to the Act.33

− A reduction in efficient dispute resolution – as the Productivity Commission notes:

Prior to the introduction of retail tenancy legislation, disputes between landlords and tenants were handled as commercial tenancy disputes. For small retailers who were unable to settle disputes via direct negotiation, the only other options were either a tribunal or court with its associated formality, expense and delay. The cost of these options had the potential to act as a barrier to efficient dispute resolution. Also, the use of the courts to settle

32 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. See also: API submission; Davine, Bedelis and Hopper submission; REIV submission. 33 Australian Property Institute submission.

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disputes had the potential to jeopardise ongoing commercial relationships between parties.34

Many of these problems have been addressed through the Act and Regulations – particularly the legislated role of the Victorian Small Business Commissioner in dispute resolution.

3.5. Rationale for government intervention

3.5.1. How effective is the existing regulatory regime?The Productivity Commission thoroughly examined Australia’s retail leases market in 2008 and considered that the market was working reasonably well overall. The Productivity Commission stated that retail leases regulation should maintain those parts of the State and Territory legislation that are working effectively. In particular, the Productivity Commission stated that “dispute settlement and information disclosure have effectively addressed market impediments related to transaction costs and information differences, and should remain part of the regulatory framework.”35 The Productivity Commission also stated that “lease disclosure provisions have effectively reduced the information gap between retail tenants and landlords”.36 The low level of disputes in the retail leases market, as discussed in Section 3.3, supports these findings.

Further, the Productivity Commission noted that there is not a strong case for further detailed regulation of the retail tenancy market as the market is already heavily regulated. The regulatory approach to date has been to add detailed prescriptive provisions to the legislation governing the relationship between retail landlords (especially shopping centres) and tenants. This approach aimed to reduce potential abuses of bargaining power by landlords and information imbalances. However, some stakeholders are concerned that “changes to retail tenancy legislation in the recent past have inadvertently tilted the balance of protection heavily in favour of tenants”37

Feedback received at the Stakeholder Forum is consistent with the Productivity Commission’s findings. Overall, the legislative framework appears to work well but there are specific instances in which it could be improved. The 2003 Act moved to more prescriptive approach and it appears, ten years after operation, that there are some of areas of legislation that are too prescriptive and offer little value in practice. Section 25 of the Act provides a good example of unnecessary regulation. It is important to note that many of the improvements to the legislation can only be made through amendment to the Act and are out of scope for this RIS.

3.5.2. Inadequate market based interventionIn the absence of regulation industry bodies in the retail leases market may develop industry standards to regulate the landlord-tenant relationship. However, industry led intervention is likely to be inadequate for two main reasons.

34 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. 35 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. 36 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March, p 233. 37 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March, p 222.

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Firstly, industry association membership does not adequately reflect the membership of the retail leases market. A number of prominent industry associations operate in the retail leases market and these groups represent different market participants such as:

− large landlords (e.g. Shopping Centre Council of Australia, Property Council of Australia);

− tenants (e.g. Australian Retailers Association); and

− property specialists including lawyers, valuers and real estate agents (e.g. Australian Property Institute, Real Estate Institute of Victoria).

Small landlords are generally not represented by relevant industry associations and small retailers, while represented by the Australian Retailers Association and other associations, may find it difficult to exert influence to the same degree as large retailers. As a result large landlords and large tenants are likely to influence any industry led intervention in their own self-interest, and potentially to the detriment of small landlords and small tenants. Consequently, industry led intervention is unlikely to protect the market participants that need protection the most due.

Secondly, industry initiatives rely on voluntary compliance. For example, an industry developed code of conduct or disclosure statement would be voluntary and is unlikely to be enforced by an industry body. A voluntary code or statement is likely to decrease the level of regulation imposed on businesses due to lower compliance levels, which will decrease the level of protection afforded to tenants, particularly small retailers. This would result in higher costs for tenants to overcome information asymmetries and market imbalances.

Feedback received at the Stakeholder Forum reflects this view. There appears to be agreement among industry stakeholders that in the absence of regulation an industry code of practice or similar instrument may be developed for shopping centre landlords but this code would not be effective because it: would not cover all landlords; would not be as comprehensive as the legislation; and would be voluntary and unable to be enforced.

In addition, in the absence of regulation, industry bodies are likely to be expected to expand their advisory function or new advisory bodies may emerge in the market. Industry associations tend to focus on information/education and advocacy, with advisory services, if provided, available to members at a cost. While an industry association such as the Australian Retailers Association may provide its members with useful information about changes to retail leases legislation, it is unlikely to have the capacity to provide specific advice on individual retail lease negotiations, particularly on a large scale.

The absence of regulation is likely to reduce legal certainty which would essentially transfer the cost of acquiring legal certainty from government to the market, with the cost likely to be ultimately borne by tenants. Considering the number of retail leases in the market and the diversity of retail tenants/premises, regulation is likely to be the more efficient approach to achieving legal certainty.

Overall, market based intervention is likely to advantage large landlords in their negotiations with tenants and this would fail to fulfil a fundamental policy principle underpinning retail legislation which is to provide protection to smaller retailers. As a result, a non-regulatory option such as a voluntary disclosure statement has not been considered in the options analysis.

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4. Current RegulationsThis chapter examines the current Regulations and discusses the rationale behind their development as a result of the 2001 Review of Victoria’s retail leases legislation. This section also considers whether the Regulations achieve their objectives and alternative approaches to the current Regulations.

4.1. ObjectivesThe Subordinate Legislation Act 1994 requires a RIS to include a statement of the proposed regulations’ objectives. These objectives should be closely related to the objectives of the Act authorising the proposed regulations. Some proposed measures may have several objectives and where this is the case, the RIS must identify a primary objective. The objectives should be stated in terms of the ends to be achieved and must be specified in relation to the underlying problems that were identified in Chapter 2. The objectives are important as they help to assess whether the proposed regulations have been appropriately selected as a means of addressing the underlying problems.

The relevant objective of the Act is to “enhance the certainty and fairness of retail leasing arrangements between landlords and tenants”. Overall, the Regulations aim to provide for successful relationships and more efficient arrangements than would otherwise be achieved between landlords and tenants.38 Three objectives are stated in the current Regulations:

− to make provision with respect to the amount of occupancy costs for the purpose of excluding certain retail premises;

− to make provision with respect to the amount of outgoings payable by a tenant; and

− to prescribe the form of the landlord’s disclosure statement.

These objectives aim to address three market failures or problems over and above the Act:

− prescribe an occupancy cost threshold to exclude large businesses from coverage under the legislation;

− prescribe a formula to fairly determine and apportion outgoings to reduce market imbalances; and

− prescribe the content and form of the disclosure statement to reduce information asymmetries.

The underlined sections of the problems above represent the primary objectives of the Regulations. The bolded sections of the above problems represent the measures by which these objectives are achieved. These measures are dictated by the Act and the impact analysis in Chapter 5 is structured around these three measures (i.e. occupancy cost threshold, outgoings formula and disclosure statement) and examines variations of each measure.

38 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.

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4.2. Prescribe an occupancy cost threshold to exclude large businesses

4.2.1. Occupancy cost approachThe 2003 Act aims to maximise the coverage of small and medium sized retail businesses under the legislation through the setting of an appropriate occupancy cost threshold. Section 4(4)(a) of the Act states that the Regulations may prescribe an occupancy cost amount or threshold.

The 2003 Act introduced “major improvements to how the coverage of the legislation is determined, so that small and medium-size tenants are not unfairly excluded”.39 A threshold issue in the design of a retail leases regulatory framework is to determine which businesses should be covered by the legislation. From a policy perspective, the legislation should focus on protecting small retail businesses as they are the parties most likely to be at a disadvantage in the marketplace in terms of negotiating position and being in possession of relevant information.40 Until 2003 the key means by which Victoria’s retail leases legislation distinguished between small and medium sized retailers and large retailers was by the floor area of the retail premises. Premises larger than 1,000 square metres were excluded from coverage under retail legislation. The 2001 Review determined that there was no strong conceptual link between the floor area rule and the financial resources of the tenant. The 1,000 square metre rule focused on the characteristics of the premises rather than the financial capacity of the tenant, meaning that it is possible for the same businesses to come under the protection of the Act in some retail locations but not others.

The rule also unfairly excluded small retail businesses that operate from large premises such as motels, caravan parks or nurseries. Further, the 1,000 square metre rule created practical difficulties of how the measurement of retail premises should be undertaken.41 The meaning of the term ‘floor area’ was the subject of significant litigation.

The 2001 Review considered a number of alternatives to the 1,000 square metre rule and determined that coverage under the Act should be determined by an occupancy cost threshold. It was concluded that “a prescribed threshold is a fairer means of determining coverage”.42 . The term ‘occupancy cost’ is defined in section 4(3) of the Act and includes the rent payable, outgoings and any other prescribed costs that the tenant is liable for. A broad definition of occupancy costs was preferred because it ensured that coverage under the legislation is not circumvented by artificially minimising the rent payable and inflating the outgoings.43

39 Second Reading Speech, Retail Leases Bill (2003), Victoria, Legislative Assembly, 27 February, John Brumby.40 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.41 Victorian Government (2003), Proposed Retail Leases Regulations 2003: Regulation impact statement, March. 42 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.43 Victorian Government (2003), Proposed Retail Leases Regulations 2003: Regulation impact statement, March.

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Occupancy cost comparison

As part of the 2003 RIS process an analysis of occupancy costs in Victoria was undertaken by Savills at the request of DBI to determine the most appropriate occupancy cost amount. Table 4 demonstrates that the 2003 analysis found that the majority of retailers (96 per cent) paid occupancy costs of less than $300,000 per annum.

Table 4: Comparison of occupancy costs 2003-2012

Gross rent range (occupancy cost)

Per cent of retail premises 2003

Per cent of retail premises 2012

Difference 2003 - 2012

0-100,000 83.5 83.5 37.5 37.5 46.0100,000-200,000 10.7 94.2 33.0 70.5 23.7200,000-300,000 1.8 96.0 14.5 85.0 11.0300,000-400,000 0.6 96.6 5.6 90.6 6.0400,000-500,000 0.4 97.0 2.9 93.5 3.5

500,000-1,000,000 0.7 97.7 3.7 97.2 0.51,000,000+ 2.3 100.0 2.8 100.0 -0.5

Source: Savills reports 2003 and 2012

DBI asked Savills to update their analysis to allow a comparison of occupancy costs between 2003 and 2012, which is presented in Table 4. Savills’ comparison of occupancy costs demonstrates two clear findings. Firstly, occupancy costs are now spread over a greater range and there are significantly fewer premises with occupancy costs under $100,000 per annum (83.5 per cent in 2003 compared to 37.5 per cent in 2012). This finding is perhaps to be expected due to a increase in costs over the last 10 years.

Secondly, Table 4 also demonstrates that the percentage of premises below the current occupancy cost threshold of $1 million per annum remains almost the same with only a small decrease of 0.5 per cent from 97.7 per cent in 2003 to 97.2 per cent in 2012. Indeed, the vast majority of retail premises still have occupancy costs less than $500,000 per annum (93.5 per cent in 2012 compared to 97 per cent in 2003). These results should be interpreted with some caution as the sample size decreased for the 2012 report and may have skewed the sample toward higher rental premises. Nonetheless, this comparative analysis provides useful information on which to base a discussion about the level at which to set the occupancy cost threshold.

4.2.2. Relationship with the publicly listed corporation ruleIt is important to note that the occupancy cost rule operates in tandem with the publicly listed company rule to exclude certain retailers from coverage under the Act. The 2001 Review determined that a readily identifiable means of distinguishing between small and large businesses is by whether they are a listed corporation as defined under the Corporations Act 2001. There is a close correlation between listed companies and big businesses. Companies that are listed on the Australian Stock Exchange, or any recognised stock exchange, could hardly be regarded as small businesses that do not have the financial capacity to make informed business decisions and require protection under retail leases legislation.44

44 Victorian Government (2001), Retail Tenancies Legislation: Discussion paper, October.

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Using multiple exclusions from the definition of retail premises helps to maintain legal certainty. For example, if a large company de-listed from the Australian Stock Exchange it could still captured by the Act because its occupancy costs may be less than the prescribed threshold. Savills’ analysis also found a strong correlation between higher occupancy costs and listed corporations. below demonstrates that in 2003, 92.7 per cent of retailers with occupancy costs between $500,000 and $1 million per annum and 100 per cent of retailers with occupancy costs over $1 million per annum were listed corporations. This means that most larger tenants were already excluded from the Act because they are a publicly listed company.

The results for 2012 are quite different and do not show the same clear pattern that is present for 2003. As a result, should be interpreted with caution as companies do not tend to list or delist from a stock exchange frequently. Therefore, the variance in the percentage of companies excluded from the Act is more likely to be due to the change in sample size/make up from 2003 to 2012. However, the table still demonstrates that the vast majority of premises with occupancy costs above $1 million per annum are publicly listed companies and thus excluded from the Act.

Table 5: Comparison of retail premises excluded by listed company rule 2003 -2012

Gross rent range (occupancy cost)

Per cent excluded retail premises

2003

Per cent excluded retail premises

2012

Difference 2003 - 2012

0-100,000 11.5 5.7 5.8100,000-200,000 25.5 8.6 16.9200,000-300,000 50.5 8.3 42.2300,000-400,000 63.6 16.2 47.4400,000-500,000 72.7 0.0 72.7

500,000-1,000,000 92.7 0.0 92.71,000,000+ 100.0 81.8 -18.2

Source: Savills reports 2003 and 2012

4.2.3. Alternative approachesSouth Australia is the only jurisdiction with a similar exclusion from coverage under the retail leases legislation, albeit using a narrower definition. In South Australia, the legislation does not apply to a retail lease if the rent payable under the lease exceeds $400,000 per annum. Minter Ellison Lawyers who participated in the Stakeholder Forum commented that a rent threshold would be preferable to an occupancy cost threshold. It was noted that the actual cost of some outgoings for the year is not known at the time the lease is entered into, therefore, there may be some uncertainty as to whether a lease is captured by the Act if its occupancy costs are close to the threshold, although Minter Ellison Lawyers acknowledged that this circumstance is rare. Nonetheless, legal certainty should be achieved where possible and a rent threshold approach should be considered. However, to change to such an approach in Victoria would require an amendment to the Act which is beyond the scope of this RIS, so a rent threshold has not been considered as a viable option.

Several other states use a floor size base rule in conjunction with a list of prescribed businesses to overcome the problem of small businesses such as a nursery from being excluded from the Act due to their large premises, as discussed in section 4.2.1. Some stakeholders have commented that Victoria should revert back to the 1,000 square metre rule as they believe this approach is more straightforward. However, as noted in section 4.2.1 there were problems with this approach and numerous stakeholders agree the 1,000 square meter rule is not appropriate. In any event, changing to a 1,000

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square metre or similar area based approach would involve an amendment to the Act which is beyond the scope of this RIS, so this approach has not been considered as a viable option.

4.2.4. Setting an appropriate thresholdThe way in which the Act is worded states the Regulations may prescribe an occupancy cost amount or threshold but in reality, the Regulations must prescribe an amount. If the Regulations remained silent and prescribed no amount then all retail leases would be excluded from the legislation as all retail leases would have occupancy costs greater than zero. This base case is discussed further in Chapter 5.

Therefore, the key question for this RIS to consider is what occupancy cost threshold can be most appropriately prescribed in the re-made Regulations. As previously stated, the occupancy cost threshold is one of the key means by which coverage under the Act is determined. If the prescribed threshold is too high the Act may capture large businesses that do not require the protection afforded by the Act. Conversely, if the prescribed threshold is too low, the Act may not cover businesses that require protection and fail to achieve the objectives of the legislation.

The current Regulations prescribe the occupancy cost amount or threshold as $1 million per annum and this amount has remained unchanged since its introduction in 2003. A threshold of $1 million per annum was chosen to:

− ensure to the greatest degree possible that small and medium sized tenants currently protected by the legislation would continue to be covered, while minimising the extent that major retailers are covered;

− provide the industry with long-term stability, as the higher threshold provides for natural growth in occupancy costs over the 10 year term of the 2003 Regulations; and

− promote legal certainty, as the higher threshold means there are less marginal cases where the proposed occupancy cost under the lease is close to $1 million per annum. Legal certainty is particularly important as coverage under the Act imposes various rights and obligations on landlords and tenants.

The 2003 RIS acknowledged that prescribing the occupancy cost at $1 million per annum, as opposed to a lower figure, imposes some costs in the form of coverage of some significant retail groups that are not publicly listed corporations. These costs are borne by landlords and potentially by those retail groups. However, this scenario would occur in limited circumstances and arguably both the landlord and tenant are of sufficient size to bear any costs imposed. Chapter 5 considers whether the current threshold still achieves the above objectives or whether a different threshold should be prescribed.

One particular issue raised at the Stakeholder Forum was whether the prescribed occupancy cost threshold was inclusive or exclusive of GST. Industry practice is to quote such costs exclusive of GST and this will be clarified in the re-made Regulations. As GST represents 10 per cent of costs this is an important item to be clarified as it could potentially push the total amount of occupancy costs with GST over the threshold amount.

In light of the above discussion, this RIS considers three different options for setting the occupancy cost threshold (relative to the base case) (Table 6).

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Table 6: Occupancy cost threshold options

Option Description

Base case The threshold to exclude retail premises from application of the Retail Leases Act 2003 would be equal to zero – thus excluding all retail premises in Victoria.

Option OC1 Retain the current threshold of $1 million per yearUnder this option the occupancy cost threshold would be set at the current $1 million per year. This option represents continuity with the 2003 Regulations and would provide certainty to landlords and tenants. Based on data provided by Savills (Table 4). Option OC1 would result in 97 per cent of retail businesses in Victoria being covered by the Act.

Option OC2 Increase the current threshold in line with inflation ($1.3 million per year)As noted above, the current occupancy cost threshold of $1 million per year was introduced in 2003. Under this option, the current threshold would be increased to $1.3 million per year to account for inflation. Based on data provided by Savills (Table 4), Option OC2 would result in greater than 98 per cent of retail businesses in Victoria being covered by the Act.

Option OC3 Decrease the threshold to $500,000 per yearUnder this option, the occupancy cost threshold would be set at $500,000, or half the current threshold. The intention of this option is to focus the Act on smaller retail businesses; assuming that larger businesses have access to sufficient resources, information and bargaining power and thus do not require protection under the Act. Based on data provided by Savills (Table 4). Option OC3 would result in 94 per cent of retail businesses in Victoria being covered by the Act.

4.2.5. Other regulations about occupancy costsSection 4(3)(c) of the Act states that occupancy costs include “any other costs of a prescribed kind that the tenant is liable to pay under the lease”. Regulation 7(2) states that for the purposes of section 4(3)(c) of the Act, advertising and promotional services, including marketing fund contributions, is prescribed as another kind of cost.

A broad definition of occupancy costs was adopted to ensure that coverage under the legislation is not circumvented by artificially minimising the rent payable and inflating the outgoings.45 Outgoings are costs that the tenant is liable for because it receives a benefit from the outgoing. A tenant would benefit from advertising and promotional services, including marketing fund contributions, thus it appears reasonable for such costs to be prescribed as an outgoing and included in the definition of occupancy costs.

45 Victorian Government (2003), Proposed Retail Leases Regulations 2003: Regulation impact statement, March.

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The Stakeholder Forum indicated some disagreement over whether costs related to advertising and promotional services are an occupancy cost or simply a cost of business. Typically such advertising and promotional services, including marketing fund contributions, only apply to tenants with retail premises located in a shopping centre and all tenants of the shopping centre must contribute to the services/fund. This cost is distinct from other advertising or marketing expenses a retailer may choose to incur to promote their business. Therefore, the general consensus among stakeholders was that such costs are indeed a cost associated with occupying the premises and should continue to be prescribed as an outgoing and included in the definition of occupancy costs.

Stakeholder feedback has not indicated that any other costs should be prescribed as an outgoing for the purposes of section 4(3)(c) of the Act and it is therefore proposed to re-make the current Regulation 7(2).

4.3. Prescribe a formula to determine and apportion outgoings to reduce market imbalances

As highlighted in section 2.2, one of the key features of the retail leases market is the potential imbalance in market power between the landlord and tenant. If the determination and apportionment of outgoings was left to the negotiation of each individual lease, it would be expected that larger tenants may be able to negotiate a lower proportion of the expenses as outgoings because of their superior bargaining power. It is inequitable for tenants to be charged a disproportionate amount of the outgoings or for expenses incurred by the landlord for which the tenant derives no direct benefit.46

Section 39 of the Act states that the lease must specify how the amount of outgoings will be determined and apportioned to the tenant. Section 39(2) also states that the regulations may prescribe the manner in which the amount of outgoings may be determined and apportioned to the tenant. Regulation 10 states that for the purposes of section 39(2) of the Act, "the amount of an outgoing may be determined and apportioned to a tenant by multiplying the total amount of the outgoing by the relevant fraction”. ‘Relevant fraction’ is defined in the Regulations as A (the lettable area of the retail premises) divided by B (the total lettable area of all the retail premises which receive the benefit of the outgoing).

This formula was introduced in the 2003 Regulations. The principle of proportionality was a feature of Victoria’s retail leases legislation prior to 2003 and the formula seeks to provide greater clarity and fairness regarding how outgoings should be determined and apportioned. The 2001 Review of the Act found there should be greater transparency and accountability in relation to outgoings and other costs paid by the tenant under the lease. The 2003 RIS considered that the formula represents a reasonably equitable approach to apportioning expenses or outgoings, as premises that comprise a larger proportion of the building would be required to make a commensurate contribution to the outgoings. As a result the Regulations provide a means by which a landlord and tenant can resolve liability for payment of outgoings and operating expenses relating to the lease. This ensures that tenants are not charged a disproportionate amount of the expenses of outgoings.47

This formula is particularly pertinent to tenants of a retail premise located in a shopping centre or other non-standalone premises. There is a large range of expenses that the

46 Victorian Government (2003), Proposed Retail Leases Regulations 2003: Regulation impact statement, March.47 Victorian Government (2003), Proposed Retail Leases Regulations 2003: Regulation impact statement, March.

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landlord has responsibility to manage but which benefit all tenants in the shopping centre such as security, gardening and landscaping, car parking and cleaning. Therefore, a method that easily and fairly apportions such expenses to individual tenants is necessary.

Victoria is the only State that prescribes a formula by which outgoings are to be determined and apportioned. However, both Queensland and Western Australia apply a similar principle to the determination and apportionment of outgoings. In both States the lease must specify how the outgoings are calculated and this method must ensure that the proportion of outgoings payable by the tenant does not exceed the proportion of the leased premises in relation to the total premises. Other States simply state that the lease should detail how the outgoings will be determined and apportioned to the tenant.

The Act provides discretion for the Regulations to prescribe a manner by which to determine and apportion outgoings. Therefore, the key questions for the RIS to consider are:

− should the Regulations continue to prescribe a formula to determine and apportion outgoings?; and

− if so, is the formula currently prescribed the most appropriate formula for determining and apportioning outgoings?

The Stakeholder Forum did not indicate any concern with the intention of the formula. Indeed, the prescribed formula appears to codify industry practice and it was suggested that the prescribed formula was useful because it provides legal certainty. As highlighted in section 3.4, the value of outgoings is one of the most disputed items in relation to the lease. A mechanism (i.e. the prescribed formula) that provides legal certainty, either by avoiding disputes in the first place or helping to clarify disputes when they occur, is generally considered to provide benefit with little, if any, cost.

However, stakeholder feedback did indicate that the actual phrasing of the formula is incorrect. The current wording of the denominator in the relevant fraction states “the total lettable area of all the retail premises which receive the benefit of the outgoing”. In a building that includes both retail and residential premises, this would mean that a cost common to all tenants of the building such as security would only be split between the retail tenants. It was suggested that the actual wording should remove the word ‘retail’ to read ‘the total lettable area of all the premises which receive the benefit of the outgoing’. With the revised wording this means that any tenant in the building that benefits from the outgoing is liable to contribute to the cost. The revised wording is consistent with both the policy intent of the formula and industry practice and it is recommended that the formula be amended accordingly.

In light of the above discussion, this RIS considers two different options for determining and apportioning outgoings (relative to the base case) (Table 7).

Table 7: Options for determining and apportioning outgoings

Option Description

Base case There would be no prescribed manner in which the amount of outgoings would be determined and apportioned to a tenant. Consequently, landlords would determine and apportion outgoings based on standard industry practice and in a manner that would be agreed by prospective tenants.

Option F1 Prescribe the current formula to determine and apportion

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outgoings (amended to reflect industry practice)Under this option, the Regulations would prescribe the current formula to determine and apportion outgoings – though the formula would be amended to remove the word ‘retail’ from ‘all the retail premises which receive the benefit of the outgoing’. Table 6 provides an example of how the prescribed formula could work in practice. Landlords would be required to use the prescribed formula for all tenants covered by the Act (e.g. those that meet the occupancy cost threshold and are not a publicly listed company). This option would provide landlords and tenants with certainty about how outgoings should be determined and apportioned. Conversely, it would also reduce the flexibility of landlords and tenants in their commercial negotiations – though noting that landlords and tenants are not prohibited under the Act or Regulations from reaching a separate agreement about how costs could be distributed between the parties (e.g. through an increase in rent).

Option F2 Prescribe a performance standard to determine and apportion outgoingsUnder this option, the Regulations would not prescribe a formula to determine and apportion outgoings. Rather, the Regulations would require landlords to determine and apportion outgoings in accordance with a performance standard (e.g. ‘the amount of an outgoing must be determined and apportioned to a tenant in a fair and equitable manner’). It would be left to landlords and tenants to agree what constitutes a ‘fair and equitable’ determination and apportion of outgoings. In practice it is likely under Option F2 that landlords and tenants would determine and apportion outgoings in manner similar to that outlined in Table 6 (i.e. based on the lettable area of the tenant relative to total lettable area). However, a landlord and tenant may agree that a tenant should pay a smaller or larger share of total outgoings based on contextual factors. For instance, both parties may agree that a tenant should pay a smaller share of total repair costs because the tenant occupies a newer part of the building that requires less maintenance. Landlords would be required to use the performance standard for all tenants covered by the Act (e.g. those that meet the occupancy cost threshold and are not a publicly listed company).This option would provide landlords and tenants with greater flexibility in their commercial negotiations; though it would reduce certainty about how outgoings should be determined and apportioned.

Table 6: Example of application of prescribed formula for outgoings under Option F1

Outgoing type

Total cost of

outgoing to

Landlord

Lettable area of tenant(sqm)

Lettable area of all the premises which receive

the benefit of the outgoing

(sqm)Relevant fraction

Outgoing payable by

tenant

Air-conditioning $1,000 75 1,000 7.5% $75

Repairs $2,000 75 1,000 7.5% $150

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Customer information services $500 75 500 15.0% $75

Total $3,500 $300

4.3.1. Other regulations about outgoingsThe Regulations include three other regulations in relation to determining and apportioning outgoings: maximum outgoing; statement of outgoings; and advertising or promotion adjustment. These regulations are examined below.

Maximum outgoing

Section 40(2) of the Act states that “a tenant is not liable to contribute towards an outgoing of the landlord…in excess of an amount calculated as prescribed by the regulations”. For the purposes of section 40(2) of the Act, regulation 11 states that “a tenant is not liable to contribute towards an outgoing of the landlord in excess of an amount calculated by multiplying the total amount of the outgoing by the relevant fraction”.

The ‘maximum outgoing’ regulation was introduced in the 2003 Regulations and appears to have a similar intent to regulation 10 ‘Determination and apportionment of outgoings’, that is, to ensure that tenants are not charged a disproportionate amount of the outgoings. However, section 40 only applies to a tenant of retail premises that are located in a retail shopping centre, whereas section 39 is of broader application to a tenant under a rental premises lease (not limited to a shopping centre). There does not appear to be any reason to remove this regulation and no stakeholder feedback has so far been received to indicate it should be removed. Similar to regulation 10, regulation 11 provides the benefit of legal certainty without imposing any costs. It is therefore proposed to re-make regulation 11.

Statement of outgoings Section 47 of the Act requires the landlord to provide the tenant with a written statement of outgoings detailing all expenditure by the landlord for each of the landlord’s accounting periods during the lease. The statement must be accompanied by an audit report that verifies it correctly states the total amount of outgoings for the accounting period. If the cost of any individual outgoing is more than the prescribed percentage of the total outgoings, the audit report must also verify the cost of the individual outgoing. For the purposes of section 47(5)(b)(i) of the Act, regulation 12 states that the prescribed percentage is 10 per cent. Therefore, an individual outgoing that is more than 10 per cent of the total outgoings must be independently verified.

The requirement for the landlord to prepare a statement of outgoings was a feature of Victoria’s retail leases legislation prior to 2003. This prescribed percentage was introduced in the 2003 legislation to provide greater transparency and accountability in relation to expenses for which the tenant is liable for.

The Act requires that a percentage must be prescribed in the Regulations. Therefore, the key question for the RIS to consider is whether the prescribed percentage should change or remain the same. In theory, if the prescribed percentage is increased (decreased), less (more) individual outgoings would fall into this category which may decrease (increase) the transparency of the statement of outgoings. As a result, this may decrease (increase) the regulatory burden imposed on the landlord, because the statement of outgoings would take less (more) time and money to complete and would be verified by an auditor.

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Table 7 below indicates that very few individual costs are more than 10 per cent of total costs. Therefore, it appears that the objective of this regulation to increase the transparency of costs is not achieved as few costs are above 10 per cent, therefore, the ‘additional’ transparency intended by the regulation is limited.

Table 7 also indicates that the majority of costs are below 5 per cent, with many costs below one per cent. Therefore, to achieve the objective of this regulation and increase the transparency of costs for tenants, it appears reasonable to suggest that the prescribed percentage should be low. Indeed, if the prescribed percentage was close to zero (e.g. 0.01) then all costs must be verified as all individual outgoings. This would provide the most benefit (i.e. maximum transparency of costs) to tenants but also impose the most costs on landlords.

Table 7: Benchmark operating expenses for Victorian shopping centres

City centre Regional Sub-

regional Neighbourhood

Total number of costs 19 22 23 21Number of costs above 10% 4 3 3 3Number of costs above 5% 7 8 7 7Number of costs above 1% 13 14 13 11Number of costs below 1% 6 8 10 10

Source: Property Council of Australia, Benchmarks 2011: Shopping centres

Feedback received at the Stakeholder Forum indicates that there will be little, if any, difference in practice if the prescribed percentage changed. Industry practice is to verify all costs regardless of the amount. This means the prescribed percentage could be any amount and it would make no practical difference to the ‘base case’. This element of the legislation, much like section 25, appears to have had good intentions when first introduced but is essentially redundant and unnecessary. Due to the way in which the Act is worded, this regulation cannot be repealed as a percentage must be prescribed. It is also not possible to prescribe ‘nil’ or ‘zero’ as the percentage. It is therefore proposed that this regulation prescribe 0.1 as the prescribed percentage. This approach will have the same practical effect as repealing the regulation but do so within the limitations of the Act.

Prescribed outgoingsSection 47(6) of the Act states that the statement of outgoings discussed above does not need to be accompanied by an auditor’s report if the statement relates to certain outgoings only. These outgoings are GST, water, sewage and drainage rates and charges, municipal council rates and charges, and insurance. Section 47(6)(a)(v) allows ‘any other outgoing of a kind prescribed by the regulations’ to be included in this list.

Stakeholder feedback has recommended that owner’s corporation fees be prescribed for the purposes of section 47(6)(v) of the Act so it does not trigger the requirement for an audit report. Owner’s corporation fees are similar to council rates or insurance premiums in that it is a necessary cost imposed by a third party at a set amount. Section 47(6)(b) of the Act states that the outgoings under section 47(6)(a) are only exempt from the auditor report requirement if they are accompanied by proof of payment (e.g. invoice, receipt) for expenditure by the landlord. Proof of payment for owner’s corporation fees should provide sufficient transparency to a tenant and further verification regarding the cost of the outgoing by an auditor seems an unnecessary compliance burden that imposes a cost without a corresponding benefit.

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Another outgoing that should be prescribed so as not to trigger the requirement for an auditor report is the fire services property levy. The Fire Services Property Levy Act 2012 (FSPL Act) has changed the way the fire services levy is charged. Previously, the fire services levy was paid by landlords as part of their insurance premiums for the building and passed on to tenants as an outgoing. Under the FSPL Act, the fire services levy will now be imposed on all properties and collected by local Councils through rates notices. Under the old scheme, the fire services levy would have been considered as ‘insurance’ under section 47(6)(a)(iv) of the Act. To maintain consistency and ensure that the fire services property levy does not trigger the requirement for an audit report, it is proposed to prescribe it as ‘any other outgoing’ for the purposes of section 47(6)(a)(v).

It is therefore proposed that a new regulation be made to prescribe owner’s corporation fees and the fire services property levy for the purposes of section 47(6)(v) of the Act.

Advertising or promotion adjustment Section 72(3) of the Act states that at the end of a lease an adjustment must be made to reflect any overpayments or underpayments by the tenant of a retail shopping centre for advertising and promotion contributions. The adjustment must be made in accordance with the Regulations. For the purposes of section 72(3) of the Act, regulation 13 states that the adjustment is to be made on a pro rata basis, only taking into account expenditure during the term of the lease.

The requirement to refund the tenant for overpayment in relation to outgoings was a feature of Victoria’s retail leases legislation prior to 2003. The 2003 legislation amended the relevant provisions to provide greater clarity about when an adjustment must be made, how it must be made (i.e. pro rata basis), and in relation to which expenses. The 2001 Review considered that the pro rata method is the most administratively efficient and equitable means of making the required adjustment.

Like the other regulations relating to outgoings, this regulation aims to ensure that tenants are not charged a disproportionate amount for outgoings. It is questioned how aware of regulation 13 landlords and tenants are and how much effect it has in practice, as there is no penalty for non-compliance. A landlord would only actively seek to enforce this regulation if the tenant has underpaid and conversely, the tenant would seek an adjustment if it has overpaid the landlord.

This regulation appears to have been made on the basis that contributions to advertising and promotion are made annually. Therefore, if a tenant’s lease concluded part way through the year it would be reasonable for that tenant to expect a refund. However, the Shopping Centre Council of Australia commented at the Stakeholder Forum that such contributions are made monthly by tenants in shopping centres. This means that at the conclusion of a lease a tenant would be refunded only a couple weeks or even days of its contribution. Moreover, the tenant is likely to have benefited from contributions made by others (e.g. previous tenant) to the advertising fund at the beginning of its lease before making the first monthly payment.

It is therefore considered that such contributions/refunds represent ‘swings and roundabouts’ and do not represent a significant financial cost to either the landlord or tenant when paid on a monthly basis. Further, the SCCA has commented that shopping centres spend their monthly advertising and promotion budget each accounting period to avoid making refunds. This practice means that monthly payments cannot be ‘saved’ and put toward peak promotion times. For example, if the accounting period is the financial year, all contributions to the fund would be spent by 30 June which may make it difficult to promote a mid-year sale. Such an approach where expenditure is based on arbitrary rules instead of marketing needs does not benefit either landlords or tenants.

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This element of the legislation also appears to have had good intentions when first introduced but is essentially redundant and unnecessary. An amendment to the Act would be required to ‘fix’ the problem outlined above as it is a requirement of the Act to make an adjustment. The Regulations can prescribe the way in which this adjustment is made. It is proposed that this regulation is repealed and not included in the re-made Regulations. This means that it will be at the discretion of landlords and tenants to agree the manner in which the adjustments for any unspent advertising and promotion contributions are made.

4.4. Prescribe a formula to determine and apportion outgoings to reduce market imbalances

As discussed in section 2.2, information asymmetries and transaction costs reduce the ability of a tenant to gain the necessary information on which to base their business decisions about the lease. An effective and relatively inexpensive means by which a tenant can access basic relevant information about the lease is through a disclosure statement provided by the landlord.48

Disclosure statements are an important part of the regulatory approach to retail leases in all Australian States. Each State requires that certain specified information be made available to prospective tenants prior to entering into a retail lease.49 Renewal of a lease or assignment of a lease to a new tenant also triggers formal disclosure requirements in most jurisdictions. In most cases this disclosure occurs through a prescribed disclosure statement, the terms and requirements of which are enshrined in primary or subordinate legislation.50 By requiring disclosure of relevant information, retail leases legislation attempts to reduce the complexity of lease conditions and improve the basis for the commercial decisions of the parties to the lease.51

“The government considers that the most effective way of minimising retail tenancy disputes is to ensure that the parties have sufficient information to make a sound business decision about entering into and renewing a lease.”52 “One of the key issues to emerge from the industry consultations is the need for improved education of both tenants and landlords on the implications of a lease before it is entered into, to help prevent disputes arising during the term of the lease”.53 The disclosure statement is a key means of achieving this as it is a critical element of the legislative framework, given that it seeks to promote informed decision-making by prospective tenants.

Section 17 of the Act states that a landlord must give a prospective tenant a disclosure statement in the form prescribed in the Regulations at least seven days before entering into a retail premises lease.. A disclosure statement must also be provided by the landlord to the tenant on renewal of the lease (section 26) and on assignment of the lease (section 61). A tenant (in the capacity of assignor) must also give a new tenant (the assignee) a disclosure statement under section 61(5A). The way in which the Act

48 Victorian Government (2003), Proposed Retail Leases Regulations 2003: Regulation impact statement, March.49 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.50 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.51 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.52 Second Reading Speech, Retail Leases Bill (2003), Victoria, Legislative Assembly, 27 February, John Brumby.53 Second Reading Speech, Retail Leases Bill (2003), Victoria, Legislative Assembly, 27 February, John Brumby.

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is worded means that a disclosure statement must be prescribed in the Regulations. The form of the disclosure statement is prescribed in Schedule 1 of the Regulations.

Importantly, the Regulations prescribe the content of the disclosure statement and this helps ensure the quality of the information provided to the tenant. If the content of the disclosure statement was not prescribed, the level of detail and the information provided by the landlord could vary dramatically across leases. In this context, a tenant may be at a relative disadvantage in lease negotiations with a landlord as they will be reliant on the landlord to determine the appropriate information to provide and then provide it in a helpful format. Prescribing the form and content of the disclosure statement ensures that tenants receive a minimum amount of information about a retail lease in a consistent and understandable format.

A disclosure statement has always been a feature of Victoria’s retail leases legislation. Each revision of the legislation has sought to improve the quality of information provided by landlords to tenants. Key items for disclosure include: lease details; rent and rent reviews; options for renewal; outgoings; and declarations by the landlord and tenant. In addition, specific information has always been sought in relation to retail premises located in a shopping centre to reflect the different operating environment of these premises compared to non-shopping centre premises.

A chronology of the key changes to the disclosure statement is as follows:

− 1986 Act: included a short disclosure statement (4 pages) as a Schedule to the Act;

− 1998 Act: included a short disclosure statement (5 pages) as a Schedule to the Act;

− 2003 Regulations: included a longer disclosure statement (11 pages) as a Schedule to the Regulations; and

− 2011 Regulations: includes a longer disclosure statement (18 pages), which is based on the core model national disclosure statement, as a Schedule to the Regulations.

The current disclosure statement came into effect on 1 January 2011 and was the result of a project undertaken by the National Retail Tenancy Working Group (NRTWG) to harmonise national retail leasing legislation. The project aimed to implement a recommendation by the Productivity Commission to improve national consistency of lease information through the development of a national reference disclosure statement.54 In 2008, Victoria (as NRTWG secretariat) commissioned PwC and legal firm Russell Kennedy to jointly develop a core model national disclosure statement. PwC and Russell Kennedy developed the national model based on an analysis of existing State and Territory disclosure statements and consultation with government and industry stakeholders.

4.4.1. Benefits and costs of disclosureThere are both costs and benefits of disclosure. The benefits come in the form of more informed tenants and ultimately a more efficient allocation of scarce resources across the retail sector. While the direct benefits accrue mainly to tenants, landlords also benefit from having well informed retailers operating within their premises.55 These benefits include:

54 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March, p 233.55 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.

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− less churn in retail leases (as tenants base their decision to sign a lease agreement on an adequate understanding of future occupancy costs and/or the operating environment of the rental property) and a reduction in associated costs (e.g. foregone rent from vacant premises and the cost of attracting and negotiating with new tenants); and

− a reduction in disputes and associated costs (such as fees for legal advice).

The costs come in the form of an administrative burden on landlords to complete the disclosure statement. The Regulations impose a compliance burden consistently across all landlords operating in the retail leases market. However, it is acknowledged that small landlords are likely to be impacted disproportionately.

While the costs and benefits of disclosure have not been quantified, there appears to be a general consensus that the benefits of disclosure to tenants outweigh the cost of disclosure to landlords. However, PwC noted in its development of a core model national disclosure statement that there is a point at which the disclosure statement becomes too long and each additional question imposes costs but actually reduces the benefit to the tenant by making the statement too long and complex.56

Importantly, the requirement for landlords to provide a disclosure statement to prospective tenants is the primary means by which the Regulations help to address the market failures described in section 2.2. How provision of a disclosure statement helps to overcome information asymmetries, potentially high transaction costs, and in some cases an imbalance in market power between landlords and tenants is described below.

Reduce information asymmetriesThe policy rationale for disclosure statements is to improve the efficiency and equity of the market for retail leases through better informed decision making.57 The notion of providing disclosure statements is based on the sound proposition that both parties to a legally binding arrangement should have the maximum available relevant information to assist their making an informed decision prior to executing any formal binding instrument.58 The disclosure statement aims to highlight key information contained in the proposed lease and presents it in a format that is easier for a tenant, particularly a small tenant, to read and understand.

Furthermore, the disclosure statement requires the landlord to provide information that will often be readily accessible to them but difficult or impossible for the tenant to acquire. In effect, this information provides the potential tenant with valuable commercial information that is not easily accessible by other means which can, in turn, help in assessing the viability of the tenant’s business plan.59

Reduce transaction costsDisclosure statements reduce both short term and longer term transaction costs associated with entering into and maintaining a retail lease. A disclosure statement reduces initial transaction costs incurred by a tenant by decreasing the cost to conduct due diligence before entering into a lease. Some information that is readily accessible

56 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.57 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.58 Victorian Government (2001), Review of the Victorian Retail Tenancies Legislation: Issues paper, January.59 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.

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to the landlord (e.g. customer foot traffic) would require a tenant to pay a property or other specialist to acquire.

In the longer term, disclosure statements also reduce the likelihood of disputes between landlords and tenants. Disclosure statements can reduce transaction costs by providing clarity at the outset as to the respective legal obligations of the parties to the lease.60 This can help to minimise costly legal proceedings at a later date, which might occur in the event that the parties were unsure of their legal standing after entering into a retail lease .61 A reduction in the incidence of business disputes has potentially significant cost savings for business, government and the economy more broadly.

Further, some information that is readily accessible to the landlord (e.g. the intention of an anchor tenant to vacate the shopping centre) may not be able to be acquired by the tenant, even for a fee. Such events may have a significant impact on the tenant and the financial success of the business. In this instance, disclosure helps to reduce the likelihood of business failure by improving decision making from the outset.

Disclosure helps to ensure that tenants enter into retail leases which are likely to prove commercially advantageous and profitable. This has a positive flow on effect for landlords by increasing the security of the tenancy and rental income. Thus, disclosure requirements improve the likelihood of mutually advantageous retail tenancy agreements.62

Reduce market imbalancesMarket imbalances in the retail leases market occur due to the superior knowledge and information about the premises held by the landlord.. A disclosure statement helps to ‘level the playing field’ in regard to lease negotiations by improving the knowledge, and consequently the negotiating position, of the tenant. The disclosure statement plays a key role in assisting the tenant to acquire power by improving knowledge.

4.4.2. National harmonisation As part of the project to develop a core model national disclosure statement, PwC also examined the benefits from national harmonisation. PwC estimated that savings between $3.3 million and $6.9 million per annum would be achieved if the model disclosure statement were to be implemented nationally. Victoria would receive approximately a quarter of the national savings or benefits from harmonisation (i.e. $0.8 million - $1.7 million). 63

To date, only three States have implemented the national model. Victoria, New South Wales (NSW) and Queensland all implemented a new disclosure statement based on the national model on 1 January 2011. These three States account for almost 80 per cent of the national retail leases market and therefore could receive up to 80 per cent of the estimated savings (i.e. $2.6 million to $5.5 million).

If Victoria implements a disclosure statement that deviates from the national model, the savings accrued individually (to Victoria) and collectively (to Victoria, NSW and Queensland) would be reduced. How much the benefits would decrease would depend on the scale of the changes.

60 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.61 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.62 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.63 PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.

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4.4.3. Disclosure statement options under consideration This RIS considers three different disclosure statement options (relative to the base case) (Table 8).

Table 8: Disclosure statement options

Option Description

Base case There would be no prescribed disclosure statement for the purposes of sections 17(1)(a), 26(1), 61(5) and 61(5A) of the Act. Consequently, landlords would not be required to provide prospective tenants (or renewing tenants) with a disclosure statement. Likewise, tenants seeking to assign a lease (e.g. as part of a sale of a business) would not be required to provide the prospective tenants with a disclosure statement.

Option DS1 Retain the current disclosure statement for all relevant sections of the ActUnder this option, the current, nationally harmonised disclosure statement would be prescribed for sections 17(1)(a), 26(1), 61(5) and 61(5A) of the Act. It would thus be used for new leases, renewed leases and assigned leases.

Table 9 summarises the content of the current disclosure statement, while Appendix E provides more detail. Stakeholder feedback indicates that the type of information required by the current disclosure statement is appropriate but that not all the information required is helpful or necessary in all situations. Thus if this single disclosure statement is retained, no significant changes would be made its content.

Based on the data outlined in Table 1, it is anticipated that there are 13,800 lease agreements each year that fall under the coverage of the Act (assuming an occupancy cost threshold of $1 million per annum). All of these would require a disclosure statement under this option.

Option DS2 Prescribe two disclosure statements – for shopping centre tenants and non-shopping centre tenants Under this option, the new Regulations would prescribe two disclosure statements. The first of these would be the current, nationally harmonised disclosure statement. This would apply to retail premises located in a shopping centre, and would be used for new leases, renewed leases and assigned leases (i.e. sections 17(1)(a), 26(1), 61(5) and 61(5A) of the Act). The second disclosure statement would be a new, streamlined disclosure statement. This would apply to retail premises that were not located in a shopping centre and would be used for new leases, renewed leases and assigned leases (i.e. sections 17(1)(a), 26(1), 61(5) and 61(5A) of the Act). This new disclosure statement reflects feedback from stakeholders that the current disclosure statement includes a raft of information (Part 9 in particular) that is not relevant to non-shopping centre tenants.64

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Option Description

Table 9 summarises the content of the current disclosure statement and the new disclosure statement for non-shopping centre tenants, while Appendix E provides more detail.Similar to Option DS1, it is assumed that landlords would need to complete 13,800 disclosure statements each year under this option. Based on Productivity Commission estimates,65 20 per cent of these disclosure statements would be for shopping centre tenants, with the remainder being for non-shopping centre tenants.

Option DS3 Prescribe four disclosure statements – for shopping centre tenants, non-shopping centre tenants, renewed leases and tenant assignment This option is the same as Option DS2; however, two abridged disclosure statements would be developed for section 26(1) of the Act (i.e. renewed leases) and for section 61(5A) of the Act (i.e. tenant assignment). These new disclosure statements reflect feedback from stakeholders that the current disclosure statement is:− Relatively superfluous for renewed leases – as tenants generally

exercise their option to renew six months before the renewed lease is due to begin, while the Act requires landlords to provide tenants with a disclosure statement 21 days before the renewed lease is due to begin. In other words, there is a mismatch between when a disclosure statement is required to be provided to a renewing tenant and the timing of the renewing tenant’s decision-making.

− Burdensome for tenant assignment – “the current disclosure statement requires the assignor to complete details ... in the disclosure statement that are almost certainly beyond its knowledge, so it is forced to rely on the provision of information from the landlord to complete the form.”66

Table 9 summarises the content of the current disclosure statement and the new disclosure statements for non-shopping centre tenants, renewed leases and tenant assignment, while Appendix E provides more detail.Similar to Options DS1 and DS2, it is assumed that landlords would need to complete 13,800 disclosure statements each year under this option. It is also assumed that:− 20 per cent of these disclosure statements would be prepared for

shopping centre tenants and 80 per cent for non-shopping centre tenants; and

− New leases would account for 15 per cent of the total (based on ABS estimates of the proportion of new retail businesses in 2010 and 2011),67 with renewed leases and assigned leases accounting for 80 per cent and 5 per cent of the total, respectively.

64 Stakeholder forum minutes. 65 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. 66 Davine, Bedelis and Hopper submission. 67 ABS (2011), ‘Counts of Australian Businesses, including Entries and Exits, Jun 2007 to Jun 2011’, cat. no. 8165.0.

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There a number of additional disclosure statement options that this RIS has not considered due to their lack of viability. These include:

− Requiring landlords to provide renewing tenants with a disclosure statement before they exercise their option to renew – while this option would directly address many of the concerns raised by stakeholders about the timing of the disclosure statement in relation to renewed leases, it would involve amendment of the Act. This option is thus outside the scope of this RIS.

− Not prescribing a disclosure statement for renewed leases and tenant assignment – one approach to address stakeholder concern about the disclosure statements in the context of renewed leases and tenant assignment would be for the new Regulations not to prescribe a disclosure statement for sections 26(1) and 61(5A) of the Act. However, the Office of the Chief Parliamentary Counsel has advised that the Regulations are required to prescribe some form of disclosure statement for all relevant sections of the Act. This option is thus not considered viable.

− Introducing a mechanism where a landlord would not provide a tenant with a disclosure statement if both parties agreed that a disclosure statement was not need. Such an ‘opt out’ mechanism would, in theory, limit the provision of disclosure statements to those situations where tenants believed that a disclosure statement was required to improve their decision-making. Though safeguards would need to be developed to prevent landlords from using their market power to compel tenants into agreeing that they did not require a disclosure statement. Nonetheless, the introduction of an ‘opt out’ mechanism would involve amendment of the Act and is thus outside the scope of this RIS.

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Table 9: Current and new disclosure statements, summary of content

Major items

Current disclosure statement (nationally

harmonised)(Schedule 2)

New disclosure statementsRetail premises not located in a retail shopping centre under

section 17(Schedule 1)

Renewed leases under section 26(1)(Schedule 3)

Assigned leases under

section 61(5A)(Schedule 4)

Note Amended Amended Amended

Contents

Key disclosure items

Premises Majority

Terms of lease and option/s to renew lease

Works, fit out and refurbishment

Rent Majority

Outgoings Majority

Other costs Minority Minority

Alteration works Minority

Trading hours

Retail trading centre details

Other disclosures

Landlord acknowledgments and signature

Tenant acknowledgments and signature

Attachments Minority

Key information New

Assignment New

Proposed assignee acknowledgments and signature

New

Legend Incorporates all sub-items included in NH DS

Amended Incorporates same sub-items as NH DS, though amended

Majority Incorporates majority of sub-items included in NH DS

Minority Incorporates minority of sub-items included in NH DS

New New material

Note: NHDS = nationally harmonised disclosure statement

DBI would be interested to receive feedback from stakeholders about whether there are any elements of the current disclosure statement that are particularly costly to complete and if so, whether stakeholders are of the opinion that the benefits justify these costs for all leases or whether they should be required for certain types of leases only.

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4.5. Silent regulationsAs highlighted in Section 2.2, the Act contains several powers to prescribe certain information that are not utilised, which are:

− section 30 Alterations to premises to enable fit out;

− section 35 Rent reviews generally;

− section 84 Functions of the Small Business Commissioner; and

− section 86 Referral of retail tenancy disputes for alternative dispute resolution.

The RIS process provides the opportunity to utilise these powers to prescribe if considered appropriate. Stakeholder feedback does not indicate that any of these powers should be utilised and further regulations prescribed.

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5. Impact analysisThis chapter assesses the impacts of the options relative to the base case. The purpose of this analysis is to inform stakeholders about the costs and benefits of each option. The sections below detail:

– how this RIS assesses the impacts of the options;

– the findings of the impact analysis; and

– the preferred options.

5.1. Approach to impact assessment There are a number of tools that can be used to rank different options and assess which will yield the greatest net benefit to society, including net present value, benefit-to-cost ratio, break-even analysis and multi-criteria analysis (MCA).68 This RIS uses the last of these tools as the basis of its approach to impact assessment.

5.1.1. Multi-criteria analysis MCA is a specific form of cost-benefit analysis that brings a degree of structure, analysis and openness to decision-making. As the Victorian Guide to Regulation states, MCA:

… is useful where it is not possible to quantify and assign monetary values to all the impacts of an option … [It] requires judgements about how proposed options will contribute to a series of criteria that are chosen to reflect the benefits and costs associated with the proposals. A qualitative score would be assigned, depending on the impact of the option on each of the criteria measured relative to the base case.69

This RIS uses MCA as its primary means to assess the impacts of the options because these impacts (especially benefits) generally cannot be precisely or reliability quantified (due to either data unavailability or the nature of the impacts themselves). This notwithstanding, this RIS does draw on a range of quantitative analysis to support the MCA, particularly with reference to the time and other costs associated with disclosure statements.

below outlines the criteria against which the options are assessed. The criteria (and their weightings) were chosen to represent the objectives of the Act/ Regulations and to cover the spectrum of likely costs and benefits associated with the options.

Each option will be scored on a scale from -10 to +10 relative to the base case. A score of zero reflects no change compared to the base case, whereas a positive (negative) score reflects a benefit (cost) to society compared to the base case. The scale from -10 to +10 also allows the relative performance of the options to be illustrated. For instance, a score of 10 indicates that an option would have “twice the impact of an option with a score of 5 (and five times the impact of an option with a score of 2 etc).”70

Table 10: Criteria for options analysis

Criteria Description Weighting

1. Focus on small – As Section 2.1.1 describes, the original 10%

68 Department of Treasury and Finance (2011), Victorian Guide to Regulation, August.69 Department of Treasury and Finance (2011), Victorian Guide to Regulation, August. 70 Department of Treasury and Finance (2011), Victorian Guide to Regulation, August.

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and medium-sized retail businesses

intent of introducing the Act was to protect only small and medium sized retail businesses. The underlying rationale was that larger businesses generally have sufficient resources, information and bargaining power to negotiate efficient outcomes. Such businesses thus do not require protection under the Act. Nor would it be effective to cover such businesses – as coverage would impose costs on larger businesses (e.g. reduced flexibility in commercial negotiation) that would not be offset by the same type or level of benefits enjoyed by small and medium sized businesses.

– Accordingly, this criterion seeks to capture the original intent of the Act. More specifically: do the options target regulatory action on small and medium-sized retail businesses (as opposed to all retail businesses, including larger businesses)?

– While the Act is primarily focused on tenants, this criterion does include both landlords and tenants.

2. Optimises decision-making around the agreement of retail leases

– Do the options address information asymmetries or deficiencies that are otherwise hindering efficient bargaining between prospective tenants and landlords?

– Do the options address the potential misuse of market power that otherwise may hinder efficient bargaining between prospective tenants and landlords?

– Do the options reduce the potential for disputes between tenants and landlords relating to retail lease agreements?

40%

3. Cost to business

– Do the options increase or decrease the regulatory burden on landlords?

– Do the options increase or decrease the regulatory burden on tenants?

50%

5.2. Impact analysis – Occupancy costs

5.2.1. Base case As noted above, the Act aims to better protect small and medium retail businesses while reducing the regulatory burden on larger retail businesses. The rationale underlying this objective is that:− Larger retail businesses generally have sufficient resources, information and

bargaining power to navigate the landlord-tenant relationship in an efficient and effective manner.

− Consequently, such businesses do not require protection under the Act. Nor would it be effective to cover such businesses – as coverage would impose costs on larger businesses (e.g. reduced flexibility in commercial negotiation) that would not

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be offset by the same type or level of benefits enjoyed by small and medium sized businesses.

To achieve the above objective, section 4(4)(a) of the Act states that the Regulations will prescribe an occupancy cost amount or threshold. Retail businesses that have occupancy costs greater than this prescribed threshold are not covered by the Act.

Under the base case, the threshold to exclude retail premises from the Act would be equal to zero (as the Regulations would not exist to prescribe an occupancy cost threshold). This would essentially render the Act null and void as all retail premises in Victoria could be expected to have annual occupancy costs of at least $1 or more. In other words, no retail tenant or landlord would be covered under the Act nor would they be required to adhere to its provisions relating to:

− the conditions of a retail lease – including minimum lease periods, options to renew, fit outs, acceptable payments (e.g. rent and outgoings) and the means by which such payments should be calculated and/or reviewed, and specific requirements for shopping centre tenants;

− the provision of information between landlords and tenants - including notification periods, and the requirement to provide tenants with a disclosure statement;

− damages, repairs, refurbishments and relocations – and the respective roles and responsibilities of landlords and tenants; and

− dispute resolution – and the role of the Small Business Commissioner.

In this environment, most landlords and tenants would only undertake activities (such as providing certain types of information) and agree to lease conditions where they:

– were required to do so under other legislation (e.g. the Crimes Act 1958, theFair Trading Act 1999 and the Competition and Consumer Act 2010); and/or

– believed the benefit of doing so would be greater than the cost.

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It is thus reasonable to expect that, under the base case, the following outcomes would result:

− Landlords and tenants would agree to lease periods that were mutually acceptable to both parties (potentially less than five year minimum currently stipulated in the Act).

− The type of outgoings to be passed on to tenants would not be centrally prescribed, but would be agreed on a case-by-case basis between landlords and prospective tenants during lease negotiations. Landlords and prospective tenants could agree as part of these negotiations for the tenant to pay an amount for tax for which the landlord or head landlord is liable under the Land Tax Act 2005.

− Landlords would apportion outgoings based on standard industry practice and in a manner that would be agreed by prospective tenants.

− The scope and associated costs of fit-outs would not be centrally prescribed but would be agreed on a case-by-case basis between landlords and prospective tenants during lease negotiations.

− The process by which rent reviews would be conducted would not be centrally prescribed but would be agreed on a case-by-case basis between landlords and prospective tenants during lease negotiations.

− Landlords may not provide information about the terms and conditions of a lease agreement (e.g. in the form of a disclosure statement) over and above the information outlined in the lease agreement.

− The roles and responsibilities of landlords and tenants with respect to alterations, refurbishments and interference that adversely affect the tenant’s business (including notification and payment of compensation) and the repair of damaged retail premises would not be centrally prescribed. Rather, these would be determined during lease negotiations and/or ongoing negotiations between the landlord and tenant at the time of an incident.

− Landlords and tenants would not be required to refer disputes to the Small Business Commissioner for alternative dispute resolution before progressing their dispute to the Victorian Civil and Administrative Tribunal (VCAT).

Furthermore, under the base case, retail tenant costs would likely increase as more current and prospective tenants would seek specialist advice (e.g. from retail consultants, valuers and lawyers) to obtain information about the operating environment of a rental property and/or the terms and conditions of a lease. This RIS is unable to quantify this cost increase due to a lack of data availability about the proportion of retail tenants that currently purchase specialist advice or would likely purchase such advice in the absence of the Regulations.

By setting an occupancy costs threshold, the Regulations determine which businesses are captured by the Retail Leases Act and there are costs involved in complying with the Act. Stakeholder views are thus specifically sought on where the occupancy cost threshold should be set, including what threshold is appropriate given the requirements in the Act.This RIS acknowledges that the provisions of the Act naturally impose regulatory costs on landlords. Therefore, the setting of the occupancy cost threshold imposes greater or lesser compliance costs for landlords, depending on where the threshold is set and which businesses are covered by the Act.

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This RIS has not costed what this amount is, or what the cost of different thresholds would be.

The primary purpose of the occupancy cost threshold is to ensure that the Act covers resource poor small and medium business tenants while not capturing well-resourced large tenants. This RIS considers three options relative to this base case:

– Option OC1 – Retain the current threshold of $1 million per year;

– Option OC2 – Increase the current threshold in line with inflation ($1.3 million per year); and

– Option OC3 – Decrease the threshold to $500,000 per year.

Greater detail about each of these options is provided in section 4.2.4.

5.2.2. Criteria 1: Focus on small and medium sized retail businesses Relative to the base case, all three options would have a greater focus on small and medium sized businesses. Each option would prescribe a threshold that would ensure the Act applies to significant proportions (upwards of 94 per cent) of retail businesses in Victoria (Table 11). This compares to the base case, under which the Act would not apply to any retail business (small, medium or large).

Table 11: Proportion of retail businesses covered by the options

Proportion of total retail businesses

Option OC1: $1 million or less in annual occupancy costs 97%

Option OC2: $1.3 million or less in annual occupancy costs at least 98%

Option OC3: $500,000 or less in annual occupancy costs 94%

Source: Savills reports 2003 and 2012

The options differ, however, on the degree to which they focus on small and medium sized businesses (as opposed to all retail businesses). As noted earlier, there are a number of different ways to define what constitutes a small and/or medium sized business. The most common definitions are based on number of employees or annual turnover.

Drawing on the analysis outlined in Appendix A, Table 12 provides an indication of the proportion of retail businesses in Victoria that meet the various definitions of ‘small business’ and ‘small and medium business’, and how these definitions align to annual occupancy costs. In essence, Table 12 suggests that:

– small retail businesses are likely to pay, at most, annual occupancy costs of between $200,000 and $500,000; and

– medium retail business are likely to pay, at most, annual occupancy costs of between $780,000 and $1.2 million.

It is important to note the limitations of the analysis outlined in Table 12; particularly:

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− the inferences that are drawn between different datasets where no direct correlation exists; and

− the relative simplicity of the underlying datasets - e.g. the Savills data has not been subject to statistical analysis to determine the mean or standard deviation and the ABS data only provides number of businesses by broad employment categories (such as ‘non-employing’, ‘1-19 staff’, ’20-199’ staff and ‘200+ staff’).

Nonetheless, in the absence of alternative data, the analysis in Table 12 provides a rough indication of the small and medium sized business makeup of the retail industry in Victoria.

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Table 12: Application of different definitions of ‘small business’ and ‘small and medium sized business’ to the Victorian retail sector

Data in support of the definition

Implication in terms of occupancy costs and

coverage of retail businesses in Victoria

Small business

As defined in terms of employment (less than 20 staff)

93% of retail businesses in Victoria employ less than 20 staff.

Given that 94% of retail businesses in Victoria pay $500,000 or less in annual occupancy costs, it is reasonable to assume that $500,000 is an appropriate threshold to capture small retail businesses (in terms of the employment definition).

As defined in terms of turnover (less than $2 million per annum)

Retail businesses in Victoria pay, on average, occupancy costs equal to 7.8% of their annual turnover. A retail business with annual turnover of $2 million would thus pay, on average, occupancy costs equal to $160,000.

An occupancy cost threshold of $200,000 (the nearest amount on which data is available) would capture 71% of retail businesses in Victoria.

Medium business

As defined in terms of employment (less than 200 staff)

Near 100% of retail businesses in Victoria employ less than 200 staff.

Given that 98% of retail businesses in Victoria pay $1.2 million or less in annual occupancy costs, it is reasonable to assume that $1.2 million is a reasonable threshold to capture small and medium retail businesses (in terms of the employment definition).

As defined in terms of turnover (less than $10 million per annum)

Retail businesses in Victoria pay, on average, occupancy costs equal to 7.8% of their annual turnover. A retail business with annual turnover of $10 million would thus pay, on average, occupancy costs equal to $780,000.

An occupancy cost threshold of $1 million (the nearest amount on which data is available) would capture 97% of retail businesses in Victoria.

Source: ABS (2012), Counts of Australian Businesses, including Entries and Exits, Jun 2007 to Jun 2011, cat. no. 8165; Savills reports 2003 and 2012; IBISWorld (2012), various industry reports, relating to them relevant ANZSIC codes, available at: http://www.ibisworld.com.au/industry/home.aspx

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Based on these findings it is reasonable to conclude that:

– Option OC1 would prescribe a threshold that would focus the most on small and medium sized businesses (as $1 million aligns closely to the range of between $780,000 and $1.2 million);

– Option OC2 would prescribe a threshold that would cover all small and medium sized retail businesses in Victoria but would also potentially capture some larger retail businesses that were not originally intended to be covered by the Act; and

– Option OC3 would prescribe a threshold that would capture small retail businesses in Victoria but not medium sized retail businesses.

Stakeholder feedback on the extent to which the options focus on small and medium sized businesses is mixed. Some stakeholders noted that since “property rents have moved substantially” over the last ten years, there are now “a significant number of premises that are not covered and protected by the current legislation.”71 Consequently, they recommended significantly increasing the threshold (to $2 million). The available data, however, suggests that the proportion of retail businesses that pay $1 million in annual occupancy costs or less has declined by only 0.5 per cent over the 2003 to 2012 period (see Table 4). Furthermore, other stakeholders noted during the Stakeholder Forum that rents for retail premises have declined in recent years because of the global economic crisis and the enduring strength of the Australian dollar.72

As explained in s.4.2.3 there is a strong correlation between higher occupancy costs and publicly listed corporations. Although no up-to-date data is available that demonstrates the number of leases with occupancy costs greater than $1 million which are also publicly listed corporations, it is unlikely that raising the cost threshold above $1 million would greatly increase the coverage of the Act as a large proportion of such businesses would be excluded from the Act under the publicly listed corporation rule.

Other stakeholders suggested that a $1 million threshold was appropriately focused on small and medium businesses noting:

We have not seen any data suggesting that tenants of premises with occupancy costs of over $1 million are suffering from the sort of imbalances in information and bargaining power that the Act was designed to address. To the contrary, in our experience, the tenants whose occupancy costs are around the $1 million mark have significant resources, information and bargaining power – sometimes more than the landlord.73

Other stakeholders indicated that the original threshold of $1 million set in 2003 was excessively high and not in line with the government’s intention to protect only small and medium retailers.74 One stakeholder suggested that the threshold could be dropped to $500,000 “to protect small retailers from large landlords.”75 Given the variability in feedback provided by stakeholders, this RIS has ranked the options against Criteria 1 primarily using the analysis outlined in Table 12(with Option OC1 receiving the highest score, followed by Option OC2 and Option OC3).

71 API submission. See also Simpson and Forsyth submission.72 Stakeholder forum minutes.73 Davine, Bedelis and Hopper submission. 74 Shopping Centre Council of Australia submission. 75 REIV, stakeholder forum minutes.

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5.2.3. Criteria 2: Optimises decision-making around the agreement of retail leasesRelative to the base case, each of the options would lead to more optimal decision-making around the agreement of retail leases. Each of the options would apply the Act to significant proportions (upwards of 94 per cent) of retail businesses in Victoria. The Act imposes various requirements some of which are highlighted below:

− Ensures prospective tenants (through the disclosure statement requirements) have access to information necessary for them to make a reliable judgment about the costs and benefits of a retail tenancy. This:

a) reduces the transaction costs associated with negotiating a lease agreement (as there is less need for a prospective tenant to engage specialist advice about the terms and conditions of a lease agreement); and

b) maximises the potential that only efficient decisions will be made about retail lease agreements.

− Provides both landlords and tenants with clarity and certainty about key elements of a lease agreement (e.g. the determination and apportion of outgoings, the length of lease periods, the process for rent reviews, and the roles and responsibilities of landlords and tenants with respect to alterations, refurbishments, interference and damages). This reduces:

a) the transaction costs associated with negotiating a lease agreement (as there is less need to engage specialist advice and/or negotiate over key elements of a lease agreement); and

b) the potential for disputes (as both parties should have a similar understanding about issues that are likely to drive disputes, such as the nature and scope of costs to be borne by tenants). Chapter 3 highlighted the relationship between the Act and the number of retail lease disputes in Victoria over the past decade.

− Reduces the potential misuse of market power as key elements of a lease agreement are prescribed in legislation and cannot be changed through negotiation between landlords and tenants.

In differentiating between the options against this criterion, it could be assumed that Option OC2 would generate the greatest benefit, as it would apply the Act to the largest proportion of businesses (Table 11), and thus impact the largest number of retail lease negotiations. However, drawing on the stakeholder feedback outlined in section 5.2.2, it is possible that Option OC2 would not provide additional benefit relative to Option OC1, as businesses with annual occupancy costs of $1 million or greater could have “significant resources, information and bargaining power”76 that would allow them to maximise their decision-making regardless of the Act. Indeed, there would be a disbenefit in capturing larger businesses under the purview of the Act, as they would be required to incur the costs of complying with the Act’s requirements, without realising offsetting benefits (e.g. in terms of enhanced information flows and protection from the potential misuse of market power).

On this basis, this RIS has given Options OC1 and OC2 and equal ranking against this criterion. Option OC3 has been ranked second, as:

– it would apply the Act to a smaller proportion of businesses than Options OC1 and OC2; and

76 Davine, Bedelis and Hopper submission.

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– stakeholder feedback suggests that some businesses with annual occupancy costs of greater than $500,000 and less than $1 million would not have access to sufficient resources, information and bargaining power to optimise decision-making around retail lease agreements.

5.2.4. Criteria 3: Cost to business Each of the options, by stipulating an occupancy cost threshold, would apply the Act to differing proportions of retail businesses in Victoria (Table 13). These businesses (as well as the relevant landlords) would thus be required to adhere to the Act and its provisions relating to:

− the conditions of a retail lease;

− information disclosure and landlord-tenant communication more broadly;

− damages, repairs, refurbishments and relocations; and

− dispute resolution.

Table 13: Coverage of the Act under the three Occupancy Cost options

Proportion of retail businesses covered by the Act

Estimated number of lease agreements that would be

subject to the Act each year

Option OC1 97% 13,800

Option OC2 98% 13,940

Option OC3 94% 13,370

Relative to the base case, each option would impose compliance costs on landlords that enter into lease agreements with tenants that have annual occupancy costs below the relevant thresholds. Three types of costs would be imposed, as below.

Education - landlords would have to educate themselves about the requirements of the Act and Regulations. New landlords would likely be required to spend more time on educating themselves than landlords familiar with the current regulatory arrangements.

Purchasing – landlords would need to either dedicate staff time or purchase external advice to ensure their internal processes and documents (e.g. lease agreements) are aligned with the requirements of the Act. The extent of these costs would be minimal for landlords that currently have processes and documents in place that are aligned with the Act.

Publication and documentation – landlords would need to dedicate staff time and, in most cases purchase legal or other specialist advice, to complete a lease, disclosure statement and other necessary documentation for tenants.

Each of the options would also impose compliance costs on tenants that have annual occupancy costs below the relevant thresholds and assign a retail lease to a new tenant. These costs would primarily involve the costs associated with preparing a disclosure statement under Section 61(5A) of the Act.

The compliance costs to business outlined above would vary across the options, driven by the number of retail businesses (and associated lease agreements) captured by the each of the options. More specifically, Option OC2 would impose the most costs on business, followed by Option OC1 and Option OC3.

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This RIS does not have access to sufficient data that would allow it to quantify the full compliance costs associated with the Occupancy Cost options. However, drawing on modelling undertaken to analyse the costs associated with the Disclosure Statement options (see section 5.4.4), Table 14 outlines the costs associated with preparing a disclosure statement (for both landlords and tenants) for the Occupancy Cost options.

Table 14: Costs to business of preparing a disclosure statement, Occupancy Costs options (present value over 10 years)

% of retail businesses

covered

Cost to landlords

Cost to tenants Total costs

Option OC1 97% $61.8 million $0.7 million $62.6 million

Option OC2 98% $62.5 million` $0.7 million $63.2 million

Option OC3 94% $59.5 million $0.7 million $60.2 million

Source: PwC analysis based on information supplied by stakeholders

The findings in Table 14 suggest that:

– all of the options would impose compliance costs on business;

– the level of these costs would vary across the options (increasing form Option OC3 to Option OC1 to Option OC2); and

– the variance in costs across the options is slight (Option C2, for instance, is only 5 per cent more costly than Option C3) – reflecting the small difference in the proportion of retail businesses covered by each of the options (ranging from 93.5 per cent to 92.3 per cent).

It is reasonable to expect that, if all the costs associated with Options OC1 to OC3 could be quantified, the relative costliness of the options would mirror that of the results outlined in Table 14.

In addition to compliance costs, the options are likely to increase other costs borne by landlords and decrease costs borne by tenants. More specifically, there are a range of costs associated with running and maintaining a retail property (e.g. costs associated with government taxes, space conditioning, utilities, repairs and maintenance and marketing). Under the base case, it is reasonable to expect that large landlords would use their superior resources, information and bargaining power relative to small and medium retail businesses to:

– pass on a greater range of operational costs to tenants than is currently allowed under the Act (e.g. land tax and/or “shortfall[s] in outgoings from … major tenants”);77 and

– limit payments to tenants and pay less than currently allowed under the Act (e.g. relating to compensation for interference and/or rent reductions due to damaged premises).

Each of the options would limit the extent to which large landlords could misuse their potential market power. This is achieved by prescribing the costs that can be passed on to a tenant (and the method of determining these costs) and the roles and responsibilities of landlords and tenants with respect to alterations, refurbishments, interference and damaged premises. Consequently, the distribution of costs between landlords and tenants under the options would favour tenants relative to the base case.

77 Australian Property Institute submission.

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Similar to compliance costs, the degree to which the options would increase costs borne by landlords and decrease costs borne by tenants would be driven by the proportion of retail businesses that are covered by each option. More specifically, Option OC2 would increase landlord costs and decrease tenant costs to a greater extent than Option OC1 and Option OC3. However, the difference between the options in this regard would be minor given their similar levels of industry coverage.

5.2.5. SummaryBased on the analysis outlined above, this RIS has scored each of the Occupancy Cost options against the three criteria as summarised below:

– Against Criteria 1, all options were considered to generate considerable benefits relative to the base case, though Option OC1 was deemed to have the greatest impact, followed by Option OC2 and Option OC3.

– Against Criteria 2, all options were considered to generate considerable benefits relative to the base case. Option OC1 and Option OC2 are expected to have a similar level of impact, while Option OC3 is expected to have a slightly smaller impact, given it covers a smaller proportion of retail businesses.

– Against Criteria 3, all options were considered to generate moderate costs relative to the base case. Option OC2 is expected to be the most costly (given its greater coverage), followed by Option OC1 and Option OC3. Though the cost difference between the options is expected to be slight.

After the relevant weightings have been applied, Option OC1 – retain the current threshold of $1 million per year - has been identified as the preferred option (Table 15).

Table 15: Occupancy costs costs threshold options – MCA summary

Weighting Base Case

Option OC1

Option OC2

Option OC3

Focus on small and medium sized businesses

10% 0 10 8 6

Optimises decision making around retail lease agreements

40% 0 10 10 8

Cost to business 50% 0 -4.5 -5 -4

Total 2.8 2.3 1.8

5.3. Impact analysis – Formula to determine and apportion outgoings

5.3.1. Base case Under the base case, there would be no prescribed manner in which outgoings are determined or apportioned to a tenant. Rather, landlords would determine and apportion outgoings based on standard industry practice and in a manner that would be agreed by prospective tenants.

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It is reasonable to expect that outgoings would be determined and apportioned in a manner similar to the formula currently prescribed in the Regulations. Stakeholders have noted that it was common practice for landlords to apportion outgoings on an area basis prior to the introduction of the Regulations in 2003.78

Despite the broad familiarity with the area basis by landlords, there would still be room for interpretation in how an area approach to determining and apportioning outgoings could be applied in practice, particularly with reference to the choice of the relevant denominator. In the absence of a prescribed formula, these issues would be left to landlords and prospective tenants to decide when negotiating a lease agreement.

Some stakeholders have noted that, in the absence of a prescribed formula, there would be potential for “shopping centre landlords to pass any shortfall in outgoings from … major tenants onto the speciality retailers in shopping centres”, as was the case prior to the Act.79 On a similar point, other stakeholders noted that, under the base case, “the opportunity to manipulate and include capital expenditure items would arise again as was the case prior to the introduction of the Act.”80

This RIS considers two options relative to this base case:

– Option F1 – Prescribe the current formula to determine and apportion outgoings (amended to reflect industry practice); and

– Option F2 – Prescribe a performance standard to determine and apportion outgoings.

Greater detail about each of these options is provided in Section 4.3.

5.3.2. Criteria 1: Focus on small and medium sized retail businesses Option F1 would have a greater focus on small and medium sized retail businesses relative to the base case. By prescribing a formula in the Regulations it would provide tenants and landlords with clarity and certainty about how outgoings should be determined and apportioned. This would, in turn, reduce:

– the need for small and medium sized businesses to purchase specialist advice about the best way to determine and apportion outgoings on an area basis during lease negotiations; and

– the potential for larger businesses to misuse their market power relative to small and medium sized businesses during lease negotiations to secure a more favourable means of determining and apportioning outgoings.

Option F2 would have a greater focus on small and medium businesses relative to the base case, but less so than Option F1. On the one hand, it would provide small and medium businesses with guidance that outgoings should be determined and apportioned in a fair and equitable manner and a basis to challenge proposed approaches to determining and apportioning outgoings that they feel do not meet this standard.

Conversely, as the performance standard would leave room for interpretation in how it could be met there would still be:

78 Australian Property Institute submission; Simpson for Forsyth submission. 79 Australian Property Institute submission. 80 Pharmacy Guild of Victoria submission.

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– the need for some small and medium sized businesses to purchase specialist advice about the best way to determine and apportion outgoings on an area basis during lease negotiations; and

– the potential for some larger businesses to misuse their market power relative to small and medium sized businesses during lease negotiations to secure a more favourable means of determining and apportioning outgoings.

5.3.3. Criteria 2: Optimises decision-making around the agreement of retail leasesOption F1 would lead to more optimal decision-making around the agreement of retail leases relative to the base case. By prescribing a formula in the Regulations, it would provide tenants and landlords with clarity and certainty about how outgoings should be determined and apportioned. Consequently:

– prospective tenants would have a firmer basis on which to judge the future costs and benefits of a retail tenancy – increasing the potential that only efficient decisions will be made about retail lease agreements;

– there would be less need for tenants and landlords to purchase specialist advice and/or negotiate over key elements of a lease agreement (reducing transaction costs) and less potential for larger businesses to misuse their market power during lease negotiations; and

– there would be less potential for disputes – as tenants and landlords would have a similar understanding about how outgoings under a lease agreement would be determined and apportioned.

It should be noted that the Productivity Commission has argued that prescriptive regulation in relation to retail leases can restrict commercial decision-making and thus may produce less than optimal outcomes.81 While this is an important point, the potential for Option F1 or F2 to constrain commercial decision-making is likely to be low, given:

− The prescribed formula underpinning Option F1 closely matches standard industry practice for determining and apportioning outgoings that existed prior to the adoption of the Act in 2003.

− Options F1 and F2 only relate to outgoings and not occupancy costs as a whole. Consequently, they do not prohibit landlords and tenants from reaching separate agreements that involve the tenant paying more or less occupancy costs in exchange for actions undertaken (or not undertaken) by the landlord. For example, under Options F1 and F2 a tenant could agree to pay a temporary increase in rent in exchange for a landlord adding extra car spaces to the property.

− Stakeholder feedback suggests that the current formula for prescribing the determination and apportionment of outgoings is “satisfactory and effective.”82

However, a number of stakeholders noted that the wording of the formula should be amended to be aligned with industry practice and the original intention of the Act.

81 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. 82 Australian Property Institute submission. See also: Davine, Bedelis and Hopper submission; Simpson and Forsyth submission; Pharmacy Guild of Victoria submission.

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Option F2 would lead to more optimal decision making around the agreement of retail leases relative to the base case but less so than Option F1. On the one hand, the performance standard would provide guidance to tenants and landlords that outgoings should be determined and apportioned in a fair and equitable manner. This would prompt both parties to seek further information about best practice and to query and test proposed approaches to determining and apportioning outgoings during negotiations.

However, Option F2 does not provide the same black-and-white certainty on the issue of outgoings as Option F1. Consequently:

– there would still be potential for some tenants to make inefficient decisions about retail leave agreements – as they may not have a complete or accurate picture of what constitutes the future costs and benefits of a retail tenancy;

– there would still be a need for some tenants and landlords to purchase specialist advice about the best way to determine and apportion outgoings on an area basis

– there would still be potential for larger businesses to misuse their market power during lease negotiations; and

– there would still be potential for disputes – as tenants and landlords may not have a common understanding about how outgoings under a lease agreement should be determined and apportioned.

5.3.4. Criteria 3: Cost to business Neither Option F1 nor Option F2 would increase the total costs of outgoings (represented as A in Figure 4) relative to the base case. Both options, however, would affect the distribution of total outgoing costs paid by landlords and retail tenants (B and C respectively).

Consequently, the assessment in this RIS of Option F1 and Option F2 against ‘Criteria 3: Cost to business’ focuses primarily on equity considerations (i.e. how the options affect the distribution of costs) rather than the absolute cost impacts of the options.

Figure 4: Outgoing costs

Repairs

etc.

Utilities

Customer Information

Total cost of outgoings (A)

Proportion of total costs paid by landlords (B)

Proportion of total costs paid by retail

tenants (C)

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Relative to the base case, both options would increase costs borne by landlords and decrease costs borne by tenants. Stakeholder feedback suggests that there is potential under the base case for landlords to:

– “pass any shortfall in outgoings from…major tenants onto the speciality retailers in shopping centres”;83 and

– “manipulate and include capital expenditure items…again as was the case prior to the introduction of the Act.”84

By prescribing a formula for how outgoings should be determined and apportioned, Option F1 would limit the extent to which landlords could pass on non-prescribed costs to tenants. It is thus reasonable to expect that, relative to the base case, Option F1 would shift the distribution of outgoings between landlords and tenants in favour of the latter over the former.

Option F2 would have a similar impact on the shifting of costs between landlords and tenants as Option F1. However, this impact would be smaller as Option F2 allows greater flexibility in how landlords and tenants agree to determine and apportion outgoings.

5.3.5. SummaryBased on the analysis outlined above, this RIS has scored each of the options against the three criteria as summarised below.

– Against Criteria 1, all options were considered to generate considerable benefits relative to the base case, though Option F1 would have a greater impact than Option F2 (given the greater certainty and clarity associated with the former).

– Against Criteria 2, all options were considered to generate considerable benefits relative to the base case, though Option F1 would have a greater impact than Option F2 (given the greater certainty and clarity associated with the former);.

– Against Criteria 3, all options were considered to generate slight costs relative to the base case. Option F1 is expected to be the largest cost impact, as its prescriptive nature is likely to lead to a greater shift in costs from tenants to landlords.

After the relevant weightings have been applied, Option F1 – prescribe the current formula to determine and apportion outgoings - has been identified as the preferred option (Table 16).

Table 16: Formula options – MCA summary

Weighting Base Case Option F1 Option F2

Focus on small and medium sized businesses 10% 0 10 8

Optimises decision making around retail lease agreements

40% 0 10 8

Cost to business 50% 0 -3 -2

Total 3.5 3

83 Australian Property Institute submission. 84 Pharmacy Guild of Victoria submission.

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5.4. Impact analysis – Disclosure statements

5.4.1. Base case Under the base case, landlords would not be required to provide prospective tenants (or renewing tenants) with a disclosure statement. The lease agreement itself would be the primary means by which landlords would inform prospective or renewing tenants about the terms and conditions of a lease. In addition, tenants seeking to assign a lease (e.g. as part of a sale of a business) would not be required to provide the prospective tenants with a disclosure statement.

Under the base case, retail tenant costs would likely increase, as more current and prospective tenants would seek specialist advice (e.g. from retail consultants, valuers and lawyers) to obtain information about the operating environment of a rental property and/or the terms and conditions of a lease. This RIS is unable to quantify this cost increase due to a lack of available data on the proportion of retail tenants that currently purchase specialist advice or would likely purchase such advice in the absence of the Regulations.

This RIS considers three options relative to this base case:

– Option DS1 – Retain the current disclosure statement for all relevant sections of the Act

– Option DS2 – Prescribe two disclosure statements – for shopping centre tenants and non-shopping centre tenants

– Option DS3 – Prescribe four disclosure statements – for shopping centre tenants, non-shopping centre tenants, renewed leases and tenant assignment.

Greater detail about each of these options is provided in Section 4.4.3.

Theoretical approach to an optimal level of disclosure The benefits of disclosure come in the form of better information to tenants and landlords, resulting in more efficient agreements and less disputation. The most important disclosures provide large additional benefits. However, beyond a point, the disclosure statement can get so large that new additions detract from its usefulness. This is akin to saying that the marginal benefit of disclosure starts high and declines as new elements are added, ultimately falling below zero (i.e. new additional disclosure provisions beyond a point are counter-productive).

Each new disclosure requirement comes at a cost; the administrative burden associated with gathering and providing the information. This means that the total cost of complying with disclosure requirements rises as new disclosures are added.

The marginal cost of new disclosures (that is the additional cost associated with an extra disclosure requirement) will depend on the nature of the disclosure. Clearly some pieces of information cost more to provide than others. However, it is unlikely that there is any systematic relationship between those items of disclosure which bring the highest marginal benefits and those which have higher or lower costs. For that reason, it cannot be assumed that the marginal cost of disclosure necessarily rises as new (less marginally beneficial) items are added. These basic assumptions are summarised in the diagram below.

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Figure 5: The marginal costs and benefits of disclosure

Marginal cost of disclosure

Marginal benefit of disclosure

A B Disclsoure

Cost

Source: PwC (2009), Retail Tenancy Disclosure Statements: Proposals for harmonisation – Final report, January.

The optimal level of disclosure occurs at point A where the marginal benefits of new disclosures are no more or less than the marginal cost. This broadly reflects the trade-off between the benefits of disclosure to tenants with the cost of disclosure to landlords.

If, on the other hand, a State was concerned only with the protection of tenants, it might choose to increase disclosure to point B – the point at which any further additional disclosure requirements would have negative effects even for tenants – owing to the length and complexity of disclosure statements. However, at point B landlords are incurring considerable costs associated with disclosure which exceeds the benefits to tenants or the broader economy. This RIS considers the impacts of the Disclosure Statement options in the context of this theoretical framework.

5.4.2. Criteria 1: Focus on small and medium sized retail businesses Relative to the base case, all of the options would have a greater focus on small and medium sized retail businesses. The requirement to provide prospective and renewing tenants with a disclosure statement ensures small and medium sized retail businesses have access to basic, relevant and comprehensible information about the key terms and conditions of a lease agreement. This reduces the need for these businesses to expend additional resources conducting due diligence (including the purchase of specialist advice).

Options DS2 and DS3 would have a greater focus on small and medium retail businesses than Option DS1 as these options include a new, streamlined disclosure statement for non-shopping tenants. These tenants are more likely to be small and medium retail businesses as well as non-franchise and independent businesses.

5.4.3. Criteria 2: Optimises decision-making around the agreement of retail leasesRelative to the base case, all of the options would lead to more optimal decision making around the agreement of retail leases. The requirement to provide a disclosure statement ensures prospective and renewing tenants have access to basic, relevant and comprehensible information about the key terms and conditions of a lease agreement. Consequently:

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– prospective tenants would have a firmer basis on which to judge the future costs and benefits of a retail tenancy – increasing the potential that only efficient decisions will be made about retail lease agreements;

– there would be less need for tenants and landlords to expend additional resources conducting due diligence (including the purchase of specialist advice); and

– there would be less potential for disputes – as tenants and landlords would have a shared understanding about the key elements of the lease agreement.

In its 2008 Inquiry into the Market for Retail Tenancy Leases in Australia, the Productivity Commission concluded that “disclosure requirements on lessees and lessors to encourage better informed decision making and contracting” were one of:

a number of innovations and practices of the current system that have been useful and are working to reduce tensions and improve the operation of the market. These do not seek to prescribe the terms of contracts, but rather enhance landlords’ and tenants’ ability to operate effectively in the market.85

Stakeholder feedback has also been generally supportive of disclosure statements and the role they can play in enhancing decision-making around the agreement of retail leases. REIV, for instance, noted in its submission that:

– disclosure statements make tenants “aware of the initial and ongoing expense involved in leasing their retail premises, and nature of the expense. This means the preparation of a tenant’s business plan is likely to be more realistic”; and

– “landlords receive a ‘benefit’ through providing information about a tenancy and the expense involved in operating a retail business from it as the prospective tenants has been provided with basic information at the time a decision is being made about whether to enter into a retail premise lease. This may result in less likelihood of defaults.”86

According to stakeholders who attended the Stakeholder Forum:

– the disclosure statements were “useful for tenants as they rely heavily on the documents and don’t do the research”;87

– “ the disclosure statement does serve a useful purpose. It alerts the tenant to certain information. It’s the wrong approach to say we’ll give them less information”;88 and

– “the [disclosure statement] is critical to [Victorian Association for Newsagents’] members. Many do research and the [disclosure statement] adds to their research.”89

Other stakeholders, however, have questioned aspects of the disclosure statements including whether the current disclosure statement:

– includes too much information – “given the voluminous nature of the information being disclosed … it is possible that some tenants do not digest or bother to comprehend the information being provided.”90 Other stakeholders noted that the

85 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. 86 REIV submission. 87 Stakeholder forum minutes.88 Stakeholder forum minutes.89 Stakeholder forum minutes.90 Shopping Centre Council submission.

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current disclosure statement includes information that is not relevant for non-shopping centre tenants;91

– enhances the decision-making of shopping centre tenants – given the range of information that shopping centre landlords are already required to provide prospective tenants (e.g. a letter of offer, the lease, a fit out guide, a tenant’s guide);92

– are necessary for renewed leases, as the Act only requires landlords to provide a disclosure statement 21 days before renewal of a lease agreement, whereas tenants generally exercise their option to renew six months before renewal of a lease agreement; and

– are necessary (or appropriate) for Section 61(5A) of the Act – given this section requires the assignor to complete a disclosure statement, even though most of the details to be completed are almost certainly beyond the assignor’s knowledge,93

and replicates the information provided to the assignee under Section 61(5) of the Act. Though stakeholders did note that assignors could provide assignees with useful information, such as the information currently addressed in Part 6 of the disclosure statement.94

Based on the feedback above, it is reasonable to expect that Options DS2 and DS3 would optimise decision-making more than Option DS1, as the streamlined disclosure statement would likely be more comprehensible for non-shopping centre tenants (and thus lead to better decision-making).

Option DS3 would optimise decision-making more than Option DS2, as:

– the abridged disclosure statement for renewal under Option DS3 would be aligned more closely with the reality of the lease renewal process (i.e. that tenants generally exercise their option to renew their lease months before a disclosure statement is required to be issued) and provide the renewing tenant with additional information (e.g. information about changes since the renewal) that would give them a firmer basis on which to judge the future costs and benefits of a retail tenancy; and

– the abridged disclosure statement for assignment would provide the assignee with information additional to the disclosure statement provided by the landlord under Section 61(5) of the Act, and more relevant to the future viability of the assignee’s ongoing business.

5.4.4. Criteria 3: Cost to business

Compliance costs Relative to the base case, each of the options would impose compliance costs on landlords that enter into lease agreements with tenants that have annual occupancy costs below the relevant threshold. These costs would primarily involve those associated with preparing a disclosure statement under the relevant Sections 17(1)(a), 26(1) and 61(5) of the Act.

91 Stakeholder forum minutes; REIV submission; Australian Property Institute submission. 92 Stakeholder forum minutes.93 Davine, Bedelis and Hopper submission. 94 Davine, Bedelis and Hopper submission; REIV submission.

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Each of the options would also impose compliance costs on tenants that have annual occupancy costs below the relevant threshold and assign a retail lease to a new tenant. These costs would primarily involve the costs associated with preparing a disclosure statement under Section 61(5A) of the Act.

Stakeholders have highlighted the high compliance costs associated with preparing a disclosure statement under the Act. They noted that it is “a nightmare for both the landlord and tenant. It is time consuming and expensive for the landlord to complete.”95

Table 17 outlines the quantified compliance costs associated with the options. While Appendix B provides more detail key assumptions to note are listed below:

− 13,800 retail leases will be agreed each year over the 10-year period that the Regulations would be in force (drawing on VSBC data outlined in Table 1 about the average number of retail lease agreements that have been entered into each year since 2003). Of these:

a) 20 per cent would involve shopping centre landlords and 80 per cent non-shopping centre landlords (drawing on Productivity Commission estimates of the balance of these tenant types in the sector)96

b) 15 per cent would be new leases, 80 per cent would be renewed leases and 5 per cent would be assigned lease. These proportions are informed by ABS data on the number of new businesses that entered the retail sector in Victoria in 2010 and 2011.97

− Shopping centre landlords would be able to dedicate specialist staff to preparing disclosure statements.98 The key costs they would face would thus be staff time.

− Non-shopping centre landlords would generally lack the institutional knowledge and resources to prepare disclosure statements themselves (see footnote Error: Reference source not found). Consequently, they would purchase the services of a lawyer or other third party to prepare a disclosure statement on their behalf. In addition to these costs, non-shopping centre landlords would also incur time costs in collating information at the request of the lawyer/third party.

− Tenants would generally incur staff time costs in preparing a disclosure statement under Section 51(A) of the Act. This time would primarily be spent collating, checking and transcribing information provided by the relevant landlord.

− The streamlined disclosure statement for non-shopping centre tenants (Options DS2 to DS3) would generate savings of 20 per cent. Stakeholder feedback is sought about the reasonableness of this assumed time saving.

95 Stakeholder forum minutes. 96 Productivity Commission (2008), The Market for Retail Tenancy Leases in Australia, Inquiry Report, March. 97 ABS (2011), ‘Counts of Australian Businesses, including Entries and Exits, Jun 2007 to Jun 2011’, cat. no. 8165.0. 98 As noted by the Shopping Centre Council in its submission, “In our experience, large landlords generally have the internal capability and personnel required to prepare and issue disclosure statements to tenants. The volume of leasing transactions undertaken by such landlords usually makes outsourcing disclosure statements to third parties … uneconomic. Smaller landlords generally require assistance to prepare such a lengthy and legalistic document.” See also: Simpson and Forsyth submission.

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− The abridged versions of the disclosure statements for Sections 26(1) and Sections 61(5A) of the Act would generate savings of between 33 per cent and 50 per cent. Stakeholder feedback is sought about the reasonableness of this assumed time saving.

Table 17: Costs to business of preparing a disclosure statement, Disclosure Statement options, assuming a threshold of $1 million in annual occupancy costs (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-shopping

centre landlords

Cost to tenants Total costs

Option DS1 $2.9 million $59 million $0.7 million $62.6 million

Option DS2 $2.9 million $47.2 million $0.7 million $50.8 million

Option DS3 $1.7 million $33.8 million $0.5 million $36 million

Table 17indicates that the compliance costs to business associated with the options decrease from Option DS1 to Option DS3.

Other costsSome stakeholders noted that disclosure statements can increase the liability of landlords (and potentially assignors) – “disclosure statements cost money and may provide for future litigation if there is misleading or incorrect information provided within the disclosure statement.”99

Cross-jurisdictional regulatory burden As Appendix C details, every jurisdiction requires landlords to provide tenants with a disclosure statement prior to agreeing a retail lease. In 2008, the Small Business Ministerial Council considered proposals for the national harmonisation of disclosure statements. On 1 January 2011, Victoria, Queensland and New South Wales introduced a new, nationally harmonised disclosure statement based on the work of the Ministerial Council. The other States and Territories have yet to adopt the nationally harmonised disclosure statement.

In this context, Options DS2 to DS3 have the potential to increase the regulatory burden on landlords operating in Victoria and Queensland and/or New South Wales as these landlords would no longer be able to base their systems for these jurisdictions on the one form of disclosure statement. Rather, they would need to broaden their systems to allow for the new disclosure statement for non-shopping centres. Under Option DS3, relevant landlords would also need to broaden their systems to allow for the new disclosure statement for renewal.

It is difficult to gauge the extent to which Options DS2 to DS3 would increase the regulatory burden on landlords operating in Victoria and Queensland and/or New South Wales. There is little publicly available data on the number of retail landlords that operate in Victoria and Queensland and/or New South Wales. However, it is reasonable to expect that most cross-jurisdictional landlords would manage shopping centres and thus have little exposure to the non-shopping centre disclosure statement contained in Options DS2 to DS3.

99 Australian Property Institute submission.

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Accordingly, this RIS concludes that Option DS2 would only have a marginal impact on the regulatory burden of landlords operating in Victoria and Queensland and/or New South Wales; while Option DS3 would have a moderate impact on regulatory burden (given its inclusion of a new disclosure statement for renewed leases).

Sensitivity analysis Sensitivity analysis has been undertaken to illustrate the impact of key variables on the cost estimates provided in Table 17.

Table 18 outlines the impact of increasing the share of new lease agreements from 15 per cent to 30 per cent (and decreasing the share of renewed lease agreements by 80 per cent to 65 per cent). This slightly increases the costs of Option DS3 (by 7.5 per cent) and has no impact on Options DS1 and DS2.

Table 18: Sensitivity analysis - increasing share of new lease agreements, reducing share of renewed lease agreements, Disclosure Statement options (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-

shopping centre

landlords

Cost to tenants Total costs

Difference from base estimates

Option DS1 $2.9 million

$59 million

$0.7 million

$62.2 million

0%

Option DS2 $2.9 million

$47.2 million

$0.7 million

$50.8 million

0%

Option DS3 $2 million$36.3

million$0.5

million$38.7

million8%

Table 19 outlines the impact of decreasing the share of new lease agreements from 15 per cent to 7.5 per cent (and increasing the share of renewed lease agreements by 80 per cent to 87.5 per cent). This slightly decreases the cost of Option DS3 (by 4 per cent) and has no impact on Options DS1 and DS2.

Table 19: Sensitivity analysis - decreasing share of new lease agreements, increasing share of renewed lease agreements, Disclosure Statement options (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-

shopping centre

landlords

Cost to tenants Total costs

Difference from base estimates

Option DS1 $2.9 million

$59 million$0.7

million$62.6

million0%

Option DS2 $2.9 million

$47.2 million

$0.7 million

$50.8 million

0%

Option DS3 $1.6 million

$32.5 million

$0.5 million

$34.7 million

-4%

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Table 20 outlines the impact of increasing the share of shopping centre leases from 20 per cent to 40 per cent (and decreasing the share of non-shopping centres from 80 per cent to 60 per cent). This decreases the cost of all options by approximately 19 per cent.

Table 20: Sensitivity analysis – increasing share of shopping centre lease agreements, Disclosure Statement options (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-

shopping centre

landlords

Cost to tenants Total costs

Difference from base estimates

Option DS1 $5.8 million

$44.2 million

$0.7 million

$50.7 million

-19%

Option DS2 $5.8 million

$35.4 million

$0.7 million

$41.9 million

-18%

Option DS3 $3.5 million

$25.4 million

$0.5 million

$29.3 million

-19%

Table 21 outlines the impact of decreasing the share of shopping centre leases from 20 per cent to 10 per cent (and increasing the share of non-shopping centres from 80 per cent to 90 per cent). This increases the cost of all options by 9 per cent.

Table 21: Sensitivity analysis – decreasing share of shopping centre lease agreements, Disclosure Statement options (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-

shopping centre

landlords

Cost to tenants Total costs

Difference from base estimates

Option DS1 $1.4 million

$66.3 million

$0.7 million

$68.5 million

9%

Option DS2 $1.4 million

$53.1 million

$0.7 million

$55.2 million

9%

Option DS3 $0.9 million

$38 million

$0.5 million

$39.4 million

9%

Table 22 outlines the impact of increasing all the time saving assumptions associated with Options DS2 and DS3. This decreases the cost associated with Option DS2 by 12 per cent and the cost associated with Option DS3 by 37 per cent.

Table 22: Sensitivity analysis - increasing time saving assumptions, Disclosure Statement options (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-

shopping centre

landlords

Cost to tenants Total costs

Difference from base estimates

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Option DS1 $2.9 million

$59 million

$0.7 million

$62.2 million

0%

Option DS2 $2.9 million

$41.3 million

$0.7 million

$44.9 million

-12%

Option DS3 $1.2 million

$21.2 million

$0.4 million

$22.7 million

-37%

Table 23 outlines the impact of decreasing all the time saving assumptions associated with Options DS2 and DS3.. This increases the costs associated with Option DS2 by 12 per cent, and the costs associated with Option DS3 by 37 per cent.

Table 23: Sensitivity analysis - decreasing time saving assumptions, Disclosure Statement options (present value over 10 years)

Cost to shopping

centre landlords

Cost to non-

shopping centre

landlords

Cost to tenants Total costs

Difference from base estimates

Option DS1 $2.9 million

$59 million$0.7

million$62.2

million0

Option DS2 $2.9 million

$53.1 million

$0.7 million

$56.7 million

12%

Option DS3 $2.3 million

$46.4 million

$0.6 million

$49.3 million

37%

The results of the sensitivity analysis indicate that:

– altering the proportion of shopping centre lease agreements has the greatest impact on all of the options;

– Option DS3 is the most sensitive to changes in the assumed time savings associated with the disclosure statements for Sections 26(1) and 61(5A) of the Act;

– Option DS1 and Option DS2 have marginal sensitivity (on an individual basis) to changes to key, underling variables; and

– while changing key variables does affect the magnitude of the costs associated with the options, it does not affect the relative costs of the options. More specifically, in the six tables outlined above, Option DS1 is always the most costly, followed by Option DS2 and Option DS3.

5.4.5. Summary Based on the analysis outlined above, this RIS has scored each of the options against the three criteria as summarised below.

– Against Criteria 1, all options were considered to generate considerable benefits relative to the base case, though Options DS2 and DS3 would have a greater impact than Option DS1 (given that the former options include a disclosure statement for non-shopping centre tenants which generally tend to be smaller and medium sized businesses).

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– Against Criteria 2, all options were considered to generate considerable benefits relative to the base case. Option DS3 was scored as having the greatest impact, followed by Option DS2 Option DS1..

– Against Criteria 3, all options were considered to generate slight to moderate costs relative to the base case. Option DS1 was deemed to be the most costly. Option DS2 and Option DS3 were deemed to be equal costly (though second to Option DS1) reflecting the findings outlined in Table 13, as well as the expectation that Option DS3 would impose a greater regulatory burden on landlords operating in Victoria and Queensland and/or New South Wales.

After the relevant weightings have been applied, Option DS3 – prescribe four disclosure statements - has been identified as the preferred option (Table 24).

Table 24: Disclosure Statements – MCA summary

Weight-ing

Base Case

Option DS1

Option DS2

Option DS3

Focus on small and medium sized businesses

10% 0 8 10 10

Optimises decision making around retail lease agreements

40% 0 6 8 10

Cost to business 50% 0 -5 -4 -4

Total 0.7 2.2 3.0

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6. Preferred options and the proposed RegulationsThis chapter summarises the preferred options and the proposed Regulations. This chapter also considers how the regulatory change will be evaluated and the limitations of this RIS process in being able to improve the regulatory environment for landlords and tenants in the retail leases market.

6.1. Summary of preferred options and proposed RegulationsAs previously stated, the way in which the Act is phrased means that the Regulations are required to be re-made in some form. Below is a summary of the preferred options against each of the three criteria used in the impact analysis outlined in Chapter 5. The preferred options are then presented in a table to demonstrate how the current regulations will be amended to form the re-made Regulations.

6.1.1. Criteria used for assessment This RIS relied on MCA to analyse each set of options and to identify preferred options. The three criteria that were applied against each of the options were:− focus on small and medium sized retail businesses (10 per cent)− optimises decision making around retail lease agreements (40 per cent)− cost to business (50 per cent)

6.1.2. Occupancy costs – Retain current thresholdThe RIS considered three options in relation to the level at which the occupancy cost threshold should be set:

– Option OC1 – Retain the current threshold of $1 million per year;

– Option OC2 – Increase the current threshold in line with inflation ($1.3 million per year); and

– Option OC3 – Decrease the threshold to $500,000 per year.

Based on the impact analysis outlined in Section 5.2, Option OC1 was identified as the preferred option (Table 25). It received the highest score against criteria 1, as it provided the best coverage of small and medium sized retailers. As the $1 million threshold was set relatively high 10 years ago, there was no demonstrated need to increase the threshold in line with inflation (Option OC2). Further, increasing the threshold may capture larger businesses that: − are not intended to be covered under the Act, and − are unlikely to realise benefits under the Act that would offset the associated costs

Alternatively, while decreasing the threshold (Option OC3) would focus the Act more on small retail businesses, it would likely exclude a number of medium-sized businesses from coverage of the Act.

Option OC1 achieved the equal highest score with Option OC2 against criteria 2. Comparatively, Option OC3 is expected to have a slightly smaller impact, given it covers a smaller proportion of retail businesses.

Finally, Option OC1 achieved the second highest score behind Option OC3 against criteria 3. Option OC2 is expected to be the most costly (given its greater coverage),

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followed by Option OC1 and Option OC3. However, the cost difference between the options is expected to be slight.

Option OC1 also has the added benefit of regulatory certainty as it requires no change to the current regulations. This means there is no real ‘transition period’ and will have little impact on existing or new leases.

Table 25: Occupancy costs threshold options – MCA summary

Weighting Base Case

Option OC1

Option OC2

Option OC3

Focus on small and medium sized businesses

10% 0 10 8 6

Optimises decision making around retail lease agreements

40% 0 10 10 8

Cost to business 50% 0 -4.5 -5 -4

Total 2.8 2.3 1.8

6.1.3. Occupancy costs – Other changesAs stated in section 4.2.6, the Stakeholder Forum indicated there was some uncertainty as to whether the prescribed occupancy cost threshold was inclusive or exclusive of GST. Industry practice is to quote such costs exclusive of GST and this will be clarified in the re-made Regulations.

As discussed in section 4.2.6, no changes will be made to other kinds of prescribed occupancy costs and advertising and promotional services, including marketing fund contributions, will continue to be prescribed. For tenants of shopping centres in particular, advertising and promotions services can be a significant cost associated required by occupying premises in the shopping centre and should be retained as a prescribed cost. No other types of costs were raised for potential inclusion as an occupancy cost as the Act already includes all relevant costs in the definition.

6.1.4. Formula to determine and apportion outgoings – Retain current formulaThe RIS considered two options in relation to how landlords determine and apportion outgoings to tenants:

– Option F1 – Prescribe the current formula to determine and apportion outgoings (amended to reflect industry practice); and

– Option F2 – Prescribe a performance standard to determine and apportion outgoings.

Based on the impact analysis outlined in Section 5.3, Option F1 was identified as the preferred option (Table 26). Against criteria 1 and 2, Option F1 is considered to have

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greater impact than Option F2, as a prescribed formula provides landlords and tenants with greater certainty and clarity regarding how outgoings should be determined and apportioned.

In addition, Option F1 provides legal certainty as this formula mirrors industry practice and does not require change to the current Regulations (except the minor clarification).

Against criteria 3, neither Option F1 nor Option F2 would increase the total costs of outgoings relative to the base case. Both options, however, would affect the distribution of total outgoings costs paid by landlords and retail tenants. Option F1 is expected to have the greatest distributive impact in this regard as its prescriptive nature is likely to lead to a greater shift in costs from tenants to landlords (relative to the performance standard underpinning Option F2, which provides tenants and landlords with some flexibility in how they determine and apportion outgoings).

Table 26: Formula options – MCA summary

Weighting Base Case Option F1 Option F2

Focus on small and medium sized businesses 10% 0 10 8

Optimises decision making around retail lease agreements

40% 0 10 8

Cost to business 50% 0 -3 -2

Total 3.5 3

6.1.5. Disclosure statement – Develop three new statementsThe RIS considered three options in relation to prescribing disclosure statement for new, renewed and assigned leases:

– Option DS1 – Retain the current disclosure statement for all relevant sections of the Act

– Option DS2 – Prescribe two disclosure statements – for shopping centre tenants and non-shopping centre tenants

Option DS3 – Prescribe four disclosure statements – for shopping centre tenants, non-shopping centre tenants, renewed leases and tenant assignment. Based on the impact analysis outlined in Section 5.4, Option DS3 was identified as the preferred option (Table 27). Against criteria 1, all options were considered to generate considerable benefits relative to the base case, though Options DS2 and DS3 would have a greater impact than Option DS1 (given that the former options include a disclosure statement for non-shopping centre tenants, which generally tend to be smaller and medium sized businesses).

Against Criteria 2, all options were considered to generate considerable benefits relative to the base case. Option DS3 was scored as having the greatest impact on the decision making of retail tenants, followed by Option DS2 and Option DS1.

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Against Criteria 3, all options were considered to generate slight to moderate costs relative to the base case. Option DS1 was deemed to be the most costly. Option DS2 and Option DS3 were deemed to be equal costly (though second to Option DS1), reflecting the findings outlined in Table 17, as well as the expectation that Option DS3 would impose a greater regulatory burden on landlords operating in Victoria and Queensland and/or New South Wales.

Table 27: Disclosure Statements – MCA summary

Weight-ing

Base Case

Option DS1

Option DS2

Option DS3

Focus on small and medium sized businesses

10% 0 8 10 10

Optimises decision making around retail lease agreements

40% 0 6 8 10

Cost to business 50% 0 -5 -4 -4

Total 0.7 2.2 3.0

6.1.6. Proposed Regulations

Table 28 below indicates there is not a substantial amount of change from the current Regulations to the proposed Regulations. As previously mentioned, the most significant change to the Regulations will be the introduction of three new schedules for each of the new disclosure statements.

Table 28: Re-made Regulations – Summary of proposed changes

Current regulation Re-made Regulations1 Objectives Minor amendment required to reflect legislative drafting best

practice

2 Authorising provisions Minor amendment may be required to reflect legislative drafting best practice

3 Commencement Minor amendment required to reflect re-made Regulations

4 Revocation Minor amendment to 4(1) required to reflect re-made Regulations

Repeal 4(2)

5 Definitions Minor amendment required to “relevant fraction” definition

6 Excluded retail premises

Minor amendment required to clarify the occupancy cost amount is exclusive of GST

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7 Occupancy costs No amendment

8 Disclosure statement Amendment required to introduce new disclosure statement forms

9 Small Business Commissioner to be notified of lease

Repealed by the Retail Leases Amendment Act 2012

10 Determination and apportionment of outgoing

No amendment

11 Maximum outgoing No amendment

12 Statement of outgoings

Minor amendment required to reflect new prescribed percentage

13 Advertising and promotion adjustment

Repeal

Schedules Amendment required to introduce three new disclosure statement forms in separate schedules

6.1.7 Competition impacts

In assessing the impact of the proposal on competition, the following questions can be considered: Does the proposed regulation limit the number or range of suppliers? Does the proposed regulation limit the ability of suppliers to compete? Does the proposed regulation limit the incentives for suppliers to compete

vigorously?

The proposal does not appear to have a significant impact on competition.

6.2. ImplementationThe proposed approach will require the government to arrange the making of the proposed regulations. Making the regulations will require resources and costs on behalf of government. While somewhat stylised, the process is likely to involve policy approval (policy officer time and departmental approval), drafting (policy officer time and Parliamentary Counsel’s drafting time), legislative approval (the regulations to be read and approved by the Minister and the Governor in Council), and promulgation (printing, and information and promotional material about changes).

These costs would be one-off and are rarely costed. However, by way of example of what this might cost:− in Western Australia, the average cost of legislative amendments drafted in 2003-

04 was in the order of $52,000; and

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− in the United Kingdom it was estimated that to implement regulatory changes relating to European Works Councils it would involve an administrative cost of amending legislation of approximately equivalent to A$400,000.

The once-off costs of creating new regulations are therefore estimated to amount to around $200,000 in the first year. The majority of this cost will already have been incurred by the Victorian Government when a decision must be made about this regulatory proposal. Therefore, this is a ‘sunk’ cost, meaning it has already been incurred and should not affect future decision making.

Responsibility for the implementation of the proposed regulations will continue to rest with DBI. As the proposed regulations are not significantly different to those currently in place, it is unlikely that DBI will require additional resources for implementation. This also applies to the processing of approvals and their associated fees.

For the stakeholders affected by the regulations (e.g. landlords, retail tenants, property advisers and industry associations), because the proposed regulations are similar to those currently in place, it is unlikely that its implementation will have a significant impact over and above existing requirements.

6.3. EvaluationThe effectiveness of the regulatory changes will be monitored through a number of means including feedback from stakeholders, any changes to the incidence of disputes relating to the Regulations handled by the VSBC and correspondence from businesses (i.e. landlords and tenants) to the Minister for Innovation, Services and Small Business about retail lease issues.

As previously stated, this statutory review of the Retail Leases Regulations is limited in scope by the Act. There are many options highlighted throughout this document that may have resulted in a more effective regulatory environment, compared to the preferred options presented. Unfortunately, these options require an amendment to the Act and such amendments are out of scope of this RIS. The RIS process has reinforced that, overall, retail leases legislation works well but there are specific elements of the legislation that are problematic. A similar statutory requirement to review the Act is not required and there is no timeframe for a review of the legislation. While the Regulations impose regulatory burden, the bulk of the regulatory burden imposed on landlords and tenants in the retail leases market is imposed through the Act. Therefore, a review of the Act is the only real way to evaluate the regulation of the market and how it could be improved.

6.4. Regulatory Change MeasurementThe Government’s Red Tape Reduction Program initiative aims to reduce the cost of regulation by 25 per cent by 1 July 2014. To measure progress towards this goal, it is mandatory for a Regulatory Change Measurement (RCM) to be completed for each relevant regulatory change. Even though the RCM is likely to use data presented in this RIS, a separate RCM must be conducted.

A RCM aims to measure different types of regulatory costs (i.e. administrative, delay and compliance costs) on affected sectors of the public (i.e. businesses, individuals).

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Typically, a RCM is conducted three months after the regulatory change occurs and it is expected that DBI will commence drafting a RCM for the re-made Regulations in August 2013.

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7. References

Australian Property Institute, ‘Retail Leases Regulations 2003 – Stakeholder consultation: Written submission’, 12 November 2012.

Davine, D., Bedelis, J., and Hopper, S. ‘Retail Leases Regulations 2003 – Stakeholder consultation: Written submission’, 11 October 2012.

Herald Sun, ‘Disputes rarely go too far’, 11 May 2012.

Office of the Victorian Small Business Commissioner, ‘Guidelines to the Retail Leases Act 2003: What are “retail premises”?, November 2005.

Pharmacy Guild of Australia, ‘Retail Leases Regulations 2003 – Stakeholder consultation: Written submission’, 12 October 2012.

PricewaterhouseCoopers, ‘Retail tenancy disclosure statements: Proposals for harmonisation – Final report’, January 2009.

Productivity Commission, ‘Inquiry into the market for retail tenancy leases in Australia’, August 2008.

Productivity Commission, ‘Economic structure and performance of the Australian retail industry: Inquiry report’, November 2011.

Property Council of Australia, ‘Benchmarks 2011: Survey of Operating Expenses for Victorian Shopping Centres’, 2011.

Real Estate Institute of Victoria, ‘Retail Leases Regulations 2003 – Stakeholder consultation: Written submission’, 16 October 2012. Savills Australia, ‘Occupancy costs comparison report: 2003 and 2012’, September 2012.

Shopping Centre Council of Australia, ‘Retail Leases Regulations 2003 – Stakeholder consultation: Written submission’, 14 October 2012.

Shopping Centre Council of Australia, ‘Submission to the Productivity Commission’s inquiry into the retail tenancy market’, 2008.

Simpson, S. and Forsyth, J., ‘Retail Leases Regulations 2003 – Stakeholder consultation: Written submission’, 12 October 2012.

Small Business Victoria, ‘Retail Leases Regulations 2003: Stakeholder forum minutes’, 18 October 2012.

Victorian Competition and Efficiency Commission, ‘Part 2 – Priorities for Regulatory Reform: An Inquiry into Victoria’s Regulatory Framework’, Draft report, March 2011.

Victorian Government, ‘Review of the Victorian Retail Tenancies Legislation: Issues paper’, January 2001.

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Victorian Government, ‘Retail tenancies legislation: Discussion paper’, October 2001.

Victorian Government, ‘Proposed Retail Leases Regulations 2003: Regulation impact statement’, March 2003.

Victorian Government, ‘Victorian guide to regulation’, May 2011.

Victorian Parliament, ‘Retail leases bill: Second reading’, 27 February 2003.

Victorian Small Business Commissioner, ‘Annual reports’, multiple years.

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Appendix A: Retail businesses in Victoria

Retail businesses in Victoria, number of businesses by size and average occupancy costs, by ANZSIC code

Retail category Number of Victorian businesses operating at end of 2011 FY Occupancy costs: a

proportion of turnover†

Non employing

1-19 employees

20-199 employees

200+ employees

Total

Car Retailing 512 513 208 9 1,242 2.3% Motor Cycle Retailing 93 123 7 0 223 2.4% Trailer and Other Motor Vehicle Retailing 68 60 10 0 138 2.3% Motor Vehicle Parts Retailing 195 238 24 4 461 4.1% Tyre Retailing 125 337 20 0 482 2.4% Fuel Retailing 305 507 69 4 885 4.0% Supermarket and Grocery Stores 1,264 1,373 276 16 2,929 1.8% Fresh Meat, Fish and Poultry Retailing 312 944 56 0 1,312 7.2% Fruit and Vegetable Retailing 264 445 48 6 763 3.6% Liquor Retailing 311 428 43 3 785 2.4% Other Specialised Food Retailing 555 860 97 4 1,516 3.6% Furniture Retailing 437 688 70 3 1,198 13.2% Floor Coverings Retailing 123 299 10 0 432 6.0% Houseware Retailing 228 280 20 0 528 1.1% Manchester and Other Textile Goods Retailing 242 276 10 7 535 9.6% Electrical, Electronic and Gas Appliance Retailing 485 700 188 5 1,378 6.0% Computer and Computer Peripheral Retailing 553 470 40 0 1,063 6.0% Other Electrical and Electronic Goods Retailing 121 139 25 3 288 6.0% Hardware and Building Supplies Retailing 504 878 127 0 1,509 1.1% Garden Supplies Retailing 318 440 51 0 809 6.0% Sport and Camping Equipment Retailing 338 549 43 5 935 8.4% Entertainment Media Retailing 128 124 7 0 259 14.4% Toy and Game Retailing 168 147 10 0 325 13.2% Newspaper and Book Retailing 396 719 87 3 1,205 7.8% Marine Equipment Retailing 82 75 0 3 160 4.8% Clothing Retailing 1,594 1,859 146 39 3,638 23.4% Footwear Retailing 190 255 32 5 482 11.3% Watch and Jewellery Retailing 297 392 22 7 718 6.0% Other Personal Accessory Retailing 93 78 13 3 187 19.6%‡ Department Stores 18 20 0 5 43 8.2% Pharmaceutical, Cosmetic and Toiletry Goods Retailing 486 862 365 7 1,720 7.2% Stationery Goods Retailing 96 123 21 0 240 6.0% Antique and Used Goods Retailing 506 274 23 3 806 6.0% Flower Retailing 298 376 14 0 688 8.8% Other Store-Based Retailing n.e.c. 1,772 1,923 123 8 3,826 7.8%‡ TOTAL 13,477 17,774 2,305 152 33,708

Source: ABS (2012), Counts of Australian Businesses, including Entries and Exits, Jun 2007 to Jun 2011, cat. no. 8165.0; IBISWorld (2012), Various retail industry reports (by ANZSIC code), available at: http://www.ibisworld.com.au/industry/home.aspx..Notes: † Occupancy costs include both rent and outgoings. Rent as a proportion of turnover was derived from the relevant IBISWorld reports. Based on data provided to DBI from Savills, outgoings are assumed to be equal to 20 per cent of rent. ‡ No IBISWorld report exists for these ANZSIC codes. These values have been derived from averages of similar ANZSIC codes.

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Appendix B: Costing assumptions The tables below outline the data and assumptions that underpinned the costs estimates of preparing a disclosure statement associated with the Occupancy Costs options and the Disclosure Statement options.

General assumptionsData / assumption Value Basis/Source

Period of analysis 10 years (April 2013 - April 2022)

Proposed timeframe of new Regulations (SBV)

Discount rate 3.5 per cent Victorian Guide to Regulation

Number of retail leases agreed each year that would require the preparation of a disclosure statement

13,800 VSBC statistics on lease notifications (Table 1)

Proportion of retail leases that involve shopping centre tenants

20 per cent The Productivity Commission estimated in its 2008 inquiry into The Market for Retail Tenancy Leases in Australia that shopping centre tenants comprised 20 per cent of the total market for retail tenancy leases.

Proportion of retail leases that are new leases

15 per cent ABS business count data (cat. no. 8165.0) indicates that 13 per cent of retail businesses in Victoria in the 2011 financial year were new businesses. PwC rounded this figure to 15 per cent.

Proportion of retail leases that are renewed leases

80 per cent PwC, based on discussions with SBV

Proportion of retail leases that are assigned leases

5 per cent PwC, based on discussions with SBV

Cost of preparing a disclosure statement

Shopping centre landlords

Staff time - 1.8 hours Five stakeholder submissions100 provided estimates of the length of staff time required to prepare a disclosure statement. Four of these estimated two hours, and the remaining estimated one hour. PwC averaged these estimates to derive the value of 1.8 hours.

Non-shopping centre landlords

Staff time - 0.9 hours Stakeholder feedback101 suggests that large landlords generally have the internal capacity to prepare disclosure statements themselves; whereas small landlords require external assistance.

100 API submission; Davine, Bedelis and Hopper submission; REIV submission; Shopping Centre Council of Australia submission; Simpson and Forsyth submission. 101 API submission; Shopping Centre Council of Australia submission; Simpson and Forsyth submission.

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Data / assumption Value Basis/Source

PwC has assumed that landlords that seek external assistance would spend less time themselves on preparing the disclosure statement. Accordingly, PwC halved the estimate of staff time for shopping centre tenants (1.8 hours) to derive the estimate for non-shopping centre tenants (0.9 hours). Stakeholder feedback is sought on the reasonableness of this assumption.

Fees to external parties - $579

Stakeholder feedback102 suggests that large landlords generally have the internal capacity to prepare disclosure statements themselves; whereas small landlords require external assistance. Five stakeholder submissions103 provided estimates of the cost associated with purchasing external advice. These estimates included:− $220 to $550 (estimated by two

submissions)− $275 to $825− $600 to $800− $750 to $1,000. PwC averaged these estimates to derive the value of $579.

Tenants Staff time - 1.8 hours Five stakeholder submissions104 provided estimates of the length of staff time required to prepare a disclosure statement. Four of these estimated two hours, and the remaining estimated one hour. PwC averaged these estimates to derive the value of 1.8 hours.

Cost estimates - staff time

Average weekly earnings (full time, Victoria)

$1,357.50 ABS (2012), Average Weekly Earnings, Australia, May 2012, cat. no. 6302.0

Earnings per week worked per annum after taking away leave

$1,604.32 PwC

Hours worked per week

40 PwC

Oncost and overhead multiplier

1.75 Victorian Guide to Regulation

102 API submission; Shopping Centre Council of Australia submission; Simpson and Forsyth submission.103 API submission; Davine, Bedelis and Hopper submission; REIV submission; Shopping Centre Council of Australia submission; Simpson and Forsyth submission. 104 API submission; Davine, Bedelis and Hopper submission; REIV submission; Shopping Centre Council of Australia submission; Simpson and Forsyth submission.

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Data / assumption Value Basis/Source

Average hourly wage (including oncosts and overheads)

$70.09 Derived from assumptions above.

Cost saving assumptions for the disclosure statementsOption Value Basis/Source

Option DS1 n/a n/a

Option DS2 20 per cent saving (for staff time and fees to external parties) for non-shopping centre landlords, for all disclosure statements

PwC, based on the reduction of items to be completed associated with the relevant disclosure statement. Stakeholder feedback is sought about the reasonableness of this assumption.

Option DS3 50 per cent saving (for staff time) for shopping centre landlords, for renewal disclosure statements

PwC, based on the reduction of items to be completed associated with the relevant disclosure statement. Stakeholder feedback is sought about the reasonableness of this assumption.

20 per cent saving (for staff time and fees to external parties) for non-shopping centre landlords, for new and assignment disclosure statements

PwC, based on the reduction of items to be completed associated with the relevant disclosure statement. Stakeholder feedback is sought about the reasonableness of this assumption.

33 per cent saving (for staff time) for non-shopping centre landlords, for renewal disclosure statements

PwC, based on the reduction of items to be completed associated with the relevant disclosure statement. Stakeholder feedback is sought about the reasonableness of this assumption.

50 per cent saving (for fees to external parties) for non-shopping centre landlords, for renewal disclosure statements

PwC, based on the reduction of items to be completed associated with the relevant disclosure statement. Stakeholder feedback is sought about the reasonableness of this assumption.

33 per cent saving (for staff time) for tenants, for assignment disclosure statements

PwC, based on the reduction of items to be completed associated with the relevant disclosure statement. Stakeholder feedback is sought about the reasonableness of this assumption.

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Appendix C: Jurisdictional use of disclosure statements All States and Territories require that landlords provide tenants with disclosure statements for retail leases. Some states also require tenants or assignees to supply landlords with a disclosure statement:

– QLD: A disclosure statement must be given by the assignee to the landlord before the landlord consents to the assignment.

– NSW: A tenant must complete, sign and provide to the landlord a disclosure statement within seven days of receiving the landlord’s disclosure statement.

– NT: The tenant must complete, sign and provide to the landlord a disclosure statement within seven days of receiving the landlord’s disclosure statement.

When a disclosure statement is required State Instances that require disclose statements

Victoria

New leases Renewals If a lease for <1 year is renewed or extended Assignment of a lease

New South Wales

New leases Renewals (updated disclosure statement must be provided) Assignment of a lease: Before requiring the consent of the

landlord to a proposed assignment, the tenant must furnish the assignee with a copy of any disclosure statement given to the tenant.

Queensland

New leases Assignment of a lease: If consent to an assignment is sought,

the landlord must provide to the assignee a disclosure statement (at least seven days prior to the landlord consenting to the assignment). *A disclosure statement is not required in the case of a periodic tenancy or renewal under option.

Northern Territory

New leases Renewal Assignments: If the assignment is in connection with the lease

of a retail shop that will continue to be an ongoing business the tenant must provide the landlord and the proposed assignee with an assignor’s disclosure statement. The landlord’s disclosure statement must also be provided to the proposed assignee by the landlord in order for consent of the assignment to be valid.

South Australia

New leases Renewal

No disclosure statement is required of the landlord if the lease is assigned. The tenant (or assignor) must provide a disclosure statement at the time of assigning the lease.

Australian Capital Territory

New leases Renewal: Even if the lease contains an option to extend, the

tenant may require the lessor to provide the tenant with a

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disclose statement (but not earlier than 3 months before the tenant may exercise the option).

Assignment: Before requiring the consent of the landlord to a proposed assignment, the tenant must furnish the assignee with a copy of any disclosure statement given to the tenant.

Western Australia

New leases*A disclosure statement is not required to be given on renewal of a retail shop lease under an option or on assignment of a retail shop lease

Tasmania New leases

Adoption of the nationally harmonised disclosure statement Victoria YesNew South Wales YesQueensland YesNorthern Territory NoSouth Australia NoAustralian Capital Territory

No

Western AustraliaNo – but they have agreed to adopt the national disclosure statement as far as possible (as of 2012)

Tasmania No

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Appendix D: ConsultationRelevant sections of the Department of Business and Innovation including the Regulation Reform Branch and Legal, Audit and Risk Branch have been consulted. The VSBC and the Victorian Competition and Efficiency Commission (VCEC) has also been consulted throughout the development of the RIS.

Stakeholder consultation was conducted in October and November 2012 that consisted of a Stakeholder Forum and online surveys for landlords and tenants of retail premises in Victoria.

A Stakeholder Forum was conducted on 18 October 2012 and representatives from the following stakeholder groups attended:– Australian Property Institute;– Australian Retailers Association;– Law Institute of Victoria*;– Minter Ellison Lawyers;– Real Estate Institute of Victoria*;– Shopping Centre Council of Australia*;– Victorian Authorised Newsagents Association;– VCEC; and– VSBC.

The following stakeholder groups were also invited to participate in the Stakeholder Forum:– Council of Australian Small Business;– Convenience and Mixed Business Association;– Franchising Council of Australia;– National Retailers Association;– Pharmacy Guild of Australia*; and– Victorian Employers’ Chamber of Commerce and Industry.

Stakeholders marked with an asterisk (*) also submitted a written submission in response to a stakeholder consultation document.

Two online surveys were also prepared to gauge the experience of landlords and tenants of retail premises in Victoria to comply with the Regulations, in particular, to provide or receive a disclosure statement. Surveys were distributed in three main ways:– Business Victoria website (business.vic.gov.au), social media (Twitter and

Facebook) and Small Business Victoria Update (fortnightly e-newsletter);– email to Business Consultation Database registrants; and– through industry associations e.g. industry associations regulation communication to

their members.

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Appendix E: Current and proposed disclosure statements, summary of content

Item

Current disclosure statement

New disclosure statements

Retail premises located in a retail

shopping centre under section 17

(Schedule 2)

Retail premises not located in a retail

shopping centre under section 17

(Schedule 1)

Renewed leases under section 26(1) (Schedule 3)

Assigned leases under section 61(5A)(Schedule 4)

Note Amended Amended AmendedContentsKey disclosure itemsPremises

Premises detailsStreet address of premisesPlan of premisesLettable area of premisesExisting structures, fixtures etcServices and facilities provided

Permitted useDescription of permitted usePermitted use exclusive

Number of car parking spacesApproximate total spacesAvailable spacesReserved spaces

Head leaseHead/Crown leaseCopy of head/Crown leaseCurrent term of head/Crown lease

91

Head landlord consentTerm of lease and option/s to renew lease

Term of leaseDate lease commencesLength of termDate lease expires

Option/s to renew leaseOption/s details

Works, fit out and refurbishmentDate of handover

Date of handoverLandlord’s works

Description of worksEstimate of contribution to works

Tenant’s fit out worksFit out worksLandlord contribution to worksLandlord requirements for fit out

RentAnnual base rent

Starting annual base rentRent free periodDate of rent commencementRent payments

Rent adjustment (rent review)Rent adjustment date and method

Rent based on turnoverRent based on turnover payableDetails of turnover required

Outgoings

92

Tenant contribution to outgoingsTenant contribution requiredOutgoings free periodCommencement date of outgoingsFormula for apportioning outgoings

Outgoings estimatesAdministrationAir condition/temperature controlBuilding/centre managementBuilding/centre securityCleaningCommunicationsCustomer facilitiesCustomer information servicesGovernment rates and chargesRepairsUtility servicesWaste managementList any other outgoingsTotal outgoings for building/centreFormula to apportion outgoingsEstimated tenant contribution

Other costsAdvertising and promotional costs

Tenant contribution requiredTenant’s annual contribution

Other monetary obligations and chargesAny other costs

Alteration worksAlteration works

93

Details of alteration worksRelocation and demolition works

Relocation clauses in leaseDemolition clauses in lease

Trading hoursCore trading hoursTenant access outside core trading hours

Access permittedRetail shopping centre details

Retail shopping centre detailsTotal number of shopsGross lettable area of centre

Annual turnover of shopping centreAnnual estimated turnoverAnnual estimated turnover by speciality shops

Major/anchor tenantsTenants and lease expiry dates

Floor plan and tenancy mixFloor planTenant mix

Customer traffic flow informationTraffic flow information collected

Casual mall licensing for common areasCode of Practice followed

Other disclosuresOther disclosures

Current legal proceedingsRepresentations by landlord

Any other representations

94

Landlord acknowledgements and signatureAcknowledgements by landlordLandlord’s signature

Name of landlordSignatureName of landlord’s representativeDate

Tenant acknowledgements and signatureAcknowledgements by tenantTenant’s signature

Name of tenantSignatureName of tenant’s representativeDate

AttachmentsList of attachments

Plan of premisesHead/Crown leaseAdditional attachments

List of attachments – retail shopping centreFloor planCustomer traffic flow statisticsCasual mall licensing policyAdditional attachments

Key informationRenewal of lease

Date of renewalOther matters

Any other mattersAssignment

95

Business recordsBusiness records provided

Landlord noticesAny landlord notices

Lease variationsAny material variations

Advice on outgoingsOutgoing details

DisputesAny current disputes

Other mattersAny other matters

Proposed assignee acknowledgements and signature

Acknowledgements by proposed assigneeProposed assignee’s signature

Name of proposed assigneeSignatureName of proposed assignee’s representativeDate

96